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

Shenandoah Telecommunications Company (NASDAQ:SHEN)

Q2 2008 Earnings Call Transcript

August 7, 2008 11:00 am ET

Executives

Adele Skolits – CFO and VP of Finance

Christopher French – President and CEO

Earle MacKenzie – EVP and COO

Analysts

Ric Prentiss – Raymond James & Associates

Will Lauber – Sterling Capital Management

Tim O'Brien – Crow Point Partners

Operator

Good morning. My name is Christy, and I will be your conference operator today. I would like to welcome everyone to the Shenandoah Telecommunications Second Quarter 2008 Earnings Conference Call. At this time, I'd like to turn the conference over to the Chief Financial Officer of Shenandoah Telecommunications, Adele Skolits.

Adele Skolits

Thank you for joining us on the inaugural earnings call for Shenandoah Telecommunications Company. The purpose of today's call is to review Shentel's results for the second quarter ended June 30th 2008.

Our results were announced and the press release distributed Tuesday, and described in our 10-Q issued last night. If you do not have copies of these documents can be found at the Company's Web site at www.shentel.com. Please note that a replay of the call will be 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 CEO, and Earle MacKenzie, our Executive Vice President and Chief Operating Officer. After our prepared remarks, we will conduct a question-and-answer session.

Before we begin I wanted to set your expectations appropriately at the outset. Shentel does not provide guidance with respect to specific future financial results. We believe providing guidance could encourage management to compromise long-term results in order to meet short-term expectations. We will, however, discuss general business trends.

Also, please note that this call may contain forward-looking statements which involve a number of known and unknown risks and uncertainties that may cause our actual results to differ materially from these statements.

Shentel provides a detailed discussion of various risks 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. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements.

With that, I'll turn the call over to Chris.

Christopher French

Good morning. And thank you for joining us. Despite the generally difficult economic conditions our country is currently facing we are pleased to report on a very strong second quarter results.

We again benefited from great performance in our PCS segment, and had solid results in our traditional local exchange telephone and CATV businesses. We do continue to have concern regarding the performance of our Converged Services segment, and we'll address that concern in greater detail on this call.

We continue to benefit from interstate fiber network and our network of over 100 towers. On a consolidated basis, our net income for the quarter is up 22% over the second quarter of 2007, reaching $7.3 million. Year-to-date, net income was $12 million which is an increase of 20% over last year.

We had a very significant milestone this quarter with our PCS retail customers now exceeding 200,000. PCS customer growth during the second quarter was driven by a reduction in churn which dropped to 1.7% from the 2% experienced in the first quarter of 2008. We are continuing to invest in our PCS network, adding 18 new cell sites in the second quarter, bringing the increase to 30 since this time a year ago.

We're making steady progress on the deployment of high-speed data services on our PCS network and now have EVODA – EVDO Rev A available to 57% of our covered pops. These changes will allow us to increase ARPU from data services and ultimately offer Sprint's CDMA-based push-to-talk product.

Our wireline telephone business continues to resist the industry trend of large percentage losses of access line as our rate of line losses remains much smaller than most others in the industry. Our end-of-quarter access line count of 24,325 is only a decrease of 211 from the end of 2007. Offsetting the impact of the line loss is growth in our DSL customers which increased by 815 during the same period.

DSL service is available to every one of our local exchange customers, and currently 37% of them use the service. As I mentioned earlier, we're not satisfied with the results of our Converged Services segment. We're just not in the point where we have sufficient scale for this segment to be profitable.

Rule making by the Federal Communications Commission on the use of exclusive service contract for video services has caused some confusion in the marketplace and caused a slowdown in addition of new properties.

We're still adding new properties and customers increasing our revenue-generating units to almost 12% from a year ago. We're also continuing to raise level of service above what is traditionally been provided by the private cable operators and the large MSOs.

Before I turn the call back to Adele, I want to touch on our announcement yesterday concerning the signing of an asset purchase agreement with Rapid Communications to acquire certain cable assets serving customers in Virginia and West Virginia.

The acquisition includes approximately 17,650 customers located in 50 franchise areas, primarily clustered around Covington, Virginia, Summersville, West Virginia, and Weston, West Virginia. The purchase price is $16.1 million and we plan to undertake a major consolidation and upgrade to the network over the next few years.

Our goal will be to offer customers expanded triple play, including high-definition TV, video-on-demand, high-speed Internet and voice services. Sale is subject to regulatory approvals and we expect to close prior to the end of 2008.

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

Adele Skolits

As Chris mentioned, we are very pleased with our second quarter results. The increases in net income Chris mentioned translate into earnings per share of $0.31 for the second quarter of 2008 and $0.51 for the year-to-date compared to $0.25 and $0.43 per share for the comparable period in 2007. Our improved performance was led by the PCS business.

As a reminder, under our agreement with Sprint Nextel, they retain 16.8% of adjusted billed revenues and we do not separately pay for various operating costs, such as travel, roaming, customer care, billing, and certain agent commissions. Our revenues are therefore reported on a net basis and thus are not directly comparable to other wireless providers.

Operating income for the PCS segment has grown 32% for the quarter, and 8% year-to-date over 2007. Average PCS subscribers were 17% greater for the second quarter and 18% greater for the year-to-date over the same period in 2007. These improvements led to commensurate gains in subscriber billings.

This growth was partially offset by increases in bad debt write-off, and credits and adjustments offered to when and retain customers resulting in net service fee increases of 12% for the quarter and 14% year-to-date.

For reasons Earle will describe in a moment, we are seeing some abatement in the ongoing bad debt write-offs. However, credits and adjustments continue at historical highs as Sprint relies on them as a tool to retain customers.

Other income for the quarter includes $1 million of universal service fund fees related to prior years and not previously recognized. They were recorded in April when Sprint Nextel first informed the company of these additional revenues.

Handset costs are flat for the quarter, but increased $1.6 million for the year-to-date due to being more generous with upgrades and replacement and underwriting a greater proportionate of the costs at the point of acquisition.

Line costs are up $1.3 million, and depreciation is up $583,000 year-to-date due to our increased investment in PCS network expansion and enhancement. The costs of operating 13 additional Nextel stores acquired in May of 2007, contributed heavily to the $1.8 million used in selling and marketing costs.

In the short run margins in this business are not expected to grow as rapidly as the growth in customers. Since we incur additional operating costs related to expanded and enhanced cell sites well in advance of the incremental revenues they produce. These incremental revenues will come in the form of additional data revenues and push-to-talk fees as well as additional customers in new coverage areas.

The telephone company's operating income drop by $652,000 for the quarter, but increased $710,000 year-to-date. A reduction in access rates was the primary cause for the telephone company revenues decreasing by 2% for the quarter and 0.5% year-to-date.

Operating costs are up this quarter due to acceleration of depreciation but down year-to-date as a result of early retirement program and severance costs incurred in early 2007.

The converged services business operating losses have decreased by 16% to $1.8 million since the second quarter of 2008. And by a 11% to $3.4 million for the year-to-date. These improvements are as a result of a 13% and 14% increase respectively for the quarter and year-to-date and revenue generating units or RGU. The RGU increase has driven a 17% and 15% increase in revenues for the quarter and year-to-date respectively.

While cost of goods sold have risen consistent with a revenue increase, other operating costs are down resulting in operating expense increases of 2% for the quarter, and 4% for the year-to-date over the same period in 2007.

Continued significant increases in our customer base will be important to getting this business to breakeven. One of our business is we don't typically highlight is our mobile Tower business.

We ended the quarter with 114 towers throughout our PCS footprint, and had 173 non-affiliate leases in comparison to 111 towers and 158 non-affiliate tenants at the end of June. As a result operating income is up 17% for the quarter to $811,000, and up 30% year-to-date to $1.6 million.

Our plans to continue improving coverage in our PCS business will lead us to increase our number of towers, and allow us to extract additional tenants and revenue. Operating margins have improved in our cable TV business with the net loss for the second quarter and year-to-date respectively declining by 43% and 64% over the same period last year.

The cable TV network serves a subset of the homes within our local exchange wireline business and contributes to mitigating access line losses. Revenue has improved as a result of a shift in product mix, and a rate increase.

Expenses are down 5% for the quarter and 14% year-to-date as a result of purchasing fewer set top boxes, and the fact that 2007 expenses included non-routine ERO and pension costs.

On a consolidated basis net cash from operations increased by 23% for the first six months of 2008 over the same period in 2007. This growth supported the $18.7 million spend in the first six months of 2008 for network improvements and expansion and other capital projects. It represents a 112% increase over 2007.

New tax legislation gives us an incentive to complete projects in 2008. This incentive and our network enhancement goals will lead us to accelerate capital spending in the latter half of 2008 as Earle will describe in a moment.

While the plan is ambitious, we expect to fund it through existing cash, cash flow generated from operations, and existing and expanded lending facilities. Finally, keep in mind that Shentel is in the process of closing our defined benefit pension plan and distributing its assets. When the final IRS approval is received, we expect to record an incremental $1.8 million of expense relating to terminating the plan.

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. During the second quarter, we reached an important milestone in PCS. We went over 200,000 retail wireless customers. That pushes our penetration of covered pops to over a 11%.

We continue to have strong growth with 16,587 gross adds and 6,292 net adds during the quarter and 34,703 gross adds and 13,094 net adds year-to-date. A major contributor to the net adds for that quarter was a drop in churn to 1.7% from the higher churn we experienced in late 2007 and early 2008.

The reasons for the drop was a tightening of credit in our Pennsylvania markets in the third quarter of 2007, completion of the conversion to the Ensemble billing platform and we work through the churn of customers put on in late 2006 and early 2007 by a former Sprint Nextel agent.

We continue to emphasize local customer service as a primary tool to keep churn low but rely on Sprint for phone-based customer support. As anticipated and planned for over the past few years we continue to see the shift in gross adds to Shentel control channels, with over 60% of gross additions under our direct control.

We currently have 19 company stores, 13 Sprint branded agent location, and 34 additional exclusive Shentel agents. As you are aware, we record our wireless revenues net of bad debt, service credits and the 16.8% the Sprint retain as a result of the simplification amendment we signed with Sprint, effective January 1st, 2007.

Total gross billed revenue per subscriber for the second quarter before any credits was $54.58 per subscriber, up $0.71 for the second quarter of 2007, and up $0.26 from the first quarter of 2008.

Gross data revenue before service credits was $12.50 per subscriber, up $2.25 from the same quarter last year and a $1.24 from the first quarter of 2008. It will become more difficult if not impossible to provide the data-only portion of billed revenue as the new Sprint everything plans become a larger percentage of our customer base.

The increase in data revenue is primarily due to the construction of 52 EVDO sites in late 2007 and an additional 41 sites through June 30 for a total of 93.

We anticipate having 200 EVDO sites by year-end 2008 which will give us approximately 90% of covered pops. We anticipate launching QChat in our Virginia, Maryland, and West Virginia markets in the fourth quarter of this year, and in Pennsylvania by year-end 2009.

Work continues on our aggressive wireless construction program for 2008. We anticipate spending over $44 million on wireless construction this year. To-date we have put into service 18 new cell sites of the 69 we plan to add for the year, for an anticipated year-end total of 415.

I have already given you our EVDO plans. We also will spend approximately $14 million on switch and existing cell site capacity to keep up with our double-digit customer growth.

Our telephone operations continued to be the bedrock of our cash flows. We ended the quarter with 24,235 access lines and 8,951 DSL customers which puts our DSL penetration at 37% of our access lines. By Shentel also having the cable franchise within our LEC area, it limits the competition other telephone companies are experiencing from cable companies elsewhere in the country.

Having a local residential telephone rate of $7.05, leaves little room for a CLEC to come into our area and provides us with some latitude to increase local rates in the future. We have had DSL access available to all of our telephone customers since 2005 and are currently offering up to five megs. We're in the process of a 1.6 million upgrade to our DSL network. By '08 year-end we will be able to offer up to 10 megs to our customers.

At the end of the second quarter, we had 8,193 basic and digital cable subscribers, which is a penetration of over 50% of the homes passed with our cable plan. We offer a solid line up that includes 31 high-definition channels. Since launching HD in late 2006, we have seen a shift from basic to the digital tiers.

As Adele mentioned, we're pleased that the loss from Converged Services decreased this quarter. The second quarter is traditionally a weak quarter since we have a drop in customers with the college students are on summer break. We ended the quarter with 35,900 revenue generating units, an increase of 11.8% from the same day last year.

In addition to preparing for students to move in during the third quarter, this summer we have upgraded the video options at 24 properties to offer digital and a high definition programming. In return for the upgrades we've gotten contract extensions from the owners.

This is very important since we fully depreciate the cost of the entire capital investment for our complex over the initial term of the contract, providing us an opportunity for much higher returns on renewals. This continues to be a challenging business with the increased focus on the end to use segment by the cable companies.

We're achieving gross margins of approximately 46%, so that profitability of this business is dependent on adding additional apartment complexes and realizing the economies of scale. We continue to upgrade our portfolio by adding more profitable complexes while exiting small non-profitable properties we obtained as part of our initial purchase of NTC.

Three additional milestones that took steps forward in the second quarter were our fiber-to-the-home business, a long-haul fiber network, and the final steps in preparation to convert to a new back office of billing platform.

In the second quarter, we launched a quadruple play, video, voice, internet and security over fiber to an upscale town center community named Preston Lake in Harrisonburg, Virginia. Upon completion there will be 575 residential units, ranging from apartments to million dollar single family homes, and up to 450,000 square feet of commercial and retail space. The contract is an exclusive 20-year contract with the homeowners association.

We have a number of additional pending fiber-to-the-home projects that have been put on hold due to the slowdown in the housing sector. We're closed to finishing the final sections of providing complete redundancy on our long-haul fiber network along the I-81 corridor from south of Harrisonburg, Virginia, through West Virginia and Maryland to the Pennsylvania line, and over into the Washington DC suburbs.

The customers on this network include large long distance carriers, large corporate customers, and we use the network to backhaul traffic for our PCS cable and Converged Services unit.

In the fourth quarter we will migrate to a new billing and back-office system that will support all of our non-PCS units. Work is nearly complete for the conversion, but management felt it was best to convert to the new system later in the year after the all move-in period of our Converged Services unit.

I'll now turn it back over to Adele.

Adele Skolits

This concludes our prepared remarks. Our operator will 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 – Raymond James & Associates

Thanks. Good morning, guys. Thanks for the initial call.

Christopher French

You're welcome.

Ric Prentiss – Raymond James & Associates

Couple of questions for you. On the PCS side of the business, churn made some good improvements like you pointed out from 2% down to 1.7%. As you look at the efforts Sprint's putting into customer care, all the efforts, Hesse, is trying to do, reduce churn Sprint, where do you think churn – postpaid churn could go for you guys? What's your kind of views as far as where that could head given your – ?

Earle MacKenzie

Ric, this is Earle MacKenzie. Traditionally, we have always been able to have three to four tens of better churn than what Sprint has been experiencing if you go back and look over the last four – three or four years. I think they made some tremendous improvements. We certainly are excited about what they've done. As their churn continues down, and it appears that they are focusing on churn being below 2% in the coming quarters, I'm assuming that we can get close to the other major carriers in our churn rate.

Ric Prentiss – Raymond James & Associates

The other major carriers – I mean, I don't know –

Earle MacKenzie

AT&T, Verizon.

Ric Prentiss – Raymond James & Associates

Okay. On the postpaid side, I think AT&T was like 1.1% and Verizon was under 1%. Do you think you can break down in below the 1.5% level?

Earle MacKenzie

I believe we can be below 1.5%. I wouldn't want to promise below 1%.

Ric Prentiss – Raymond James & Associates

A pretty amazing number. On the data ARPU side, I appreciate you giving us that data that $12.50 is a pretty significant number with year-over-year and quarter-over-quarter increases what type of services are people taking? And when you say you're going to have a hard time unbundling it out of the simply Everything plan, how is the simple Everything plan doing as far as take rate?

Earle MacKenzie

Well, we’ve been having some tremendous success on selling air cards as far as – as we have spread out EVDO, one of the things that we've also focused on is not only our traditional wireless customer, but in the lot of our service areas there is still no cable, modem, or DSL service. And so we've made a point to make the areas aware that wireless opportunity is available if they don't have another broadband option. If I look at the Everything plan we had approximately just under 9,000 people sign up for one of the Everything plan since they were launched. About 25% of those are new customers, and approximately 75% are our existing customers who have upgraded to those plans.

Ric Prentiss – Raymond James & Associates

And then the push-to-talk, being able to get Rev A out there, you mentioned the – all but Pennsylvania being able to offer QChat by the end of the year. What’s your hope for that product? Is it new customers, is it getting IDEN customers that were in your area moved over? What are your thoughts as far as what the opportunity for you is with QChat?

Christopher French

I think it – both areas, both of those customer segments will be our focus. Obviously, anyone who's push-to-talk centric is going to be interested in having the best service available. One of the advantage that we particularly have in the Virginia – West Virginia, Maryland area is we have a very, very strong coverage area. And by overlaying it with EV-DO we believe that we will have the very competitive if not the best in a breed in that area as far as offering both the voice and a push-to-talk product.

Ric Prentiss – Raymond James & Associates

Any idea how many IDEN customers are in your territory currently?

Christopher French

We don't have that information.

Ric Prentiss – Raymond James & Associates

Okay. And then final question I think you mentioned that there might be the need to tap into some of the existing facilities and maybe look to expand the debt. Any thoughts on timing or what type of approach the debt markets you might take?

Adele Skolits

We actually are talking to our existing debt holder. And believe it will be quite successful in that regard. Obviously, realize that our debt-to-equity ratio is very low at this point. So we're hopeful that we can get a very competitive rate there.

Ric Prentiss – Raymond James & Associates

Any thoughts as far as where that leverage level might head to or what you might target?

Adele Skolits

I don't have a specific number to give you at this point, Ric, but obviously, we got a tremendous amount of debt capacity at this point.

Ric Prentiss – Raymond James & Associates

Okay. Good luck.

Adele Skolits

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Will Lauber from Sterling Capital Management. Your line is open.

Will Lauber – Sterling Capital Management

Hi. It looks –so I guess you guys paid a little over $900 per customer for the cable – ?

Adele Skolits

That's correct. $925.

Will Lauber – Sterling Capital Management

And do you know – or, are you going to release like what services those customers have, whether it's video, voice, Internet, or how is that compared to your current cable option?

Earle MacKenzie

Well, currently, they are quite undeveloped. Only about 1,000 customers are using more than just video, and in many cases, the video line-up is significantly smaller than the one that we currently offer. So as Chris mentioned, our primary focus will be to retain the customers that we have, but to be upgrading those networks very, very quickly to offer a triple play and these are relatively small markets. Most of them do have a DSL option. But the DSL is fairly limited, and so we believe that by having – rebuilding that network having a long, strong local presence and providing some real marketing support that has not been there in the past. We can significantly increase the both the video and the data penetrations.

Will Lauber – Sterling Capital Management

Okay. So I guess about a year and a half ago when I started looking at your company, I was kind of doing some of the parts, and I was using around $800 per customer for your cable. Is it just differ by the area or – ?

Earle MacKenzie

I would say that $800 is quite low compared to what recent transactions that had happened. We believe that the $925 puts us probably right at the bottom of any known transactions even for rural properties.

Will Lauber – Sterling Capital Management

And this Rapid Communications, I went to their website, could find too much information I guess the private company. But they look like they had about 36,000 customers in total. Is that right? So this would be close to half their operation. Is that – ?

Earle MacKenzie

It is significant piece of it. I don’t know exactly how many customers – I thought they had more than 36,000, they are in. They've been buying smaller properties in a number of states. I think they actually have properties in over 30 states. So I think that their overall customer base is quite a bit larger than the 36,000 number that you mentioned. I guess they haven't updated their site. But we've – we're only focusing on the ones that are clustered in the central part of West Virginia and in the Covington area of the Virginia.

Will Lauber – Sterling Capital Management

Okay. And I guess moving on, the towers – I guess Sprint just recently sold a lot of their towers and it looks like it was well over $200,000 per tower. And that's pretty low for the industry as well. Is that not?

Earle MacKenzie

Yes, it is. I think if you look at – these are some towers that they had not sold in some previous transactions. We have a very large number relatively speaking considering that we have more of a rural footprint of additional tenants. So that would be a – on the low end of an estimate for what our tower assets might be worth.

Will Lauber – Sterling Capital Management

And your dial-up customers versus your DSL customers what the difference in profitability there? Is – ?

Earle MacKenzie

Well, the dial-up customers are quite profitable, because the equipment that we're using is at this point fully depreciated. It's not an issue of profitability or not. It's really a customer preference. And we still have new dial up customers sign up every month. So we offer that that product to the customers that has that level of service need. But we are seeing just a constant migration to a broadband solution.

Will Lauber – Sterling Capital Management

And then I guess who's going to answer this question until your release of the acquisition last night, but just kind of going forward, obviously, this year you're making a (inaudible) reasons to upgrade all the sites. On the PCS side, what kind of going out, couple of years, obviously, you guys turn a lot of care – spin off lot of cash what is the kind of plan going forward I guess we're going to – how long is the cable upgrade going to take? Is that over like the next year as well?

Earle MacKenzie

As we talked about in our shareholders meeting the wireless construction program is really a two-year program. This year and next. So there will – it won't be as high as this year, but there will be a significant amount of CapEx for the wireless next year as we finish out or EVDO deployment of primarily and be able to offer QChat in, in Pennsylvania. And on our new cable acquisition, I expect that it will be approximate of two-year construction period. We're in the process right now of doing some detailed analysis of what that construction will be and we will be in a position by year-end, a good estimate of exactly how much we'll have to spend over the next few years.

Adele Skolits

And after that will you can expect that we will be looking very hard at, how we best put that cash to work for our shareholders. Whether it be through additional acquisitions or returning the funds to the shareholders or what have you.

Will Lauber – Sterling Capital Management

And with the NTC business, you had touched on that, in the comments, you had mentioned that I guess your additions of kind of slowed down, can you touch on that a little bit further – and I guess at what point – like how many properties, or revenue generating units is kind of like the breakeven point for that division?

Earle MacKenzie

As far as slowing down, that hasn't been the case actually. We continue to grow at a fairly good pace as I mentioned in my prepared comments. We are evaluating each property that we have and some of the revenue generating units that were attended last year are not counted this year because we made the decision to exit the property, because it didn't have the kind of margin, contribution that we’re looking for. As far as, as exactly the number of generating units, that's difficult to give an exact number, because there is a lot of factors we have. The size of the property, whether it's a bulk property or retail property, bulk meaning the owner pays the monthly fee, retail meaning that we bill it to the individual customer. Each one of those have a different cost structure. But obviously, we need to have significantly more revenue generating units than we have right now, probably, at least in excess of twice the number that we have.

Will Lauber – Sterling Capital Management

And you brought the bulk versus retail accounts. You used to break that down. Is – I haven't seen adequately? Or am I just missing that, that something that you don't disclose any more?

Earle MacKenzie

We haven't been doing it because we weren't sure that anyone was even following that, that something we certainly can consider adding back to our disclosures.

Will Lauber – Sterling Capital Management

Okay. But, I don't know – it looks like at least through 2006, the bulk accounts were fairly steady that still the case?

Earle MacKenzie

They are. That actually the bulk business – primarily the bulk business are student business. And that has been very, very steady and growing.

Will Lauber – Sterling Capital Management

Okay. Thank you very much.

Adele Skolits

You're quite welcome.

Operator

(Operator instructions) Now we have a follow-up question from Ric Prentiss with Raymond James. Your line is open.

Ric Prentiss – Raymond James & Associates

Thanks. On the cable TV M&A, do you know what the expected EBITDA impact is going to be? You mentioned the deal expected to close by year-end, so what kind of lift on EBITDA should we be looking for from those 17,000 plus customers?

Adele Skolits

Ric, as I mentioned at the beginning of the call we don't share specific projected financial outcomes. It will take a year or two before that, that business really begins to prove itself.

Ric Prentiss – Raymond James & Associates

And then on the towers I just want to confirm I heard you guys right. At the end of 2Q '08 has 114 towers with a 173 third-party leases, and with the 111 towers and a 158, was that second quarter last year or was that first quarter this year?

Adele Skolits

That was second quarter of last year.

Ric Prentiss – Raymond James & Associates

Okay. So you've added a couple of towers but obviously added a lot more tenants on it, and – any thoughts on this business you want to keep running, I think you're getting the full value for it back to the earlier comments from the other guy in the call that Sprint towers might look like a low price per tower, but on a tower cash flow basis, it's a pretty high multiple, they actually paid close to 24 times on tower cash flow, this many third-party tenants you guys have obviously got a much more valuable asset.

Earle MacKenzie

We think it's a valuable asset for us to continue to hold on to what we always continue to evaluate all parts of our business, but it's a part of the business that is kind of critical and key to our PCS business. We are going to be building quite a few towers as part of the expansion that we're doing this year and next. And we will continue to be adding tenants on it. You're probably correct in that. It doesn’t necessarily always get reflected in our stock price.

Ric Prentiss – Raymond James & Associates

It looks like – if I included you as a tenant which obviously you don't charge yourself, it will be close to 2.5 tenants per tower ballpark, which is very close to the public tower guys get a pretty nice multiple.

Adele Skolits

We charge ourselves, but obviously it's eliminated in consolidation.

Ric Prentiss – Raymond James & Associates

Right. Thanks for the extra color.

Adele Skolits

Alright. Thank you.

Operator

Our next question comes from the line of Tim O'Brien with Crow Point Partners. Your line is open.

Tim O'Brien – Crow Point Partners

Hi, guys. Excellent quarter, and just wanted to add to Ric's comments that we certainly do appreciate the initiation of quarterly calls. Could you give us on the cable acquisition that you announced some idea of what the penetration is in that area, the extent of overlap with your ILEC franchise, if any? And I apologize if that's a dumb question, but I'm in the car so I don't have my map in front of me. And also could you tell us how much CapEx you anticipate putting into that property over the next couple of years?

Earle MacKenzie

As far as – there is no – the answer to one of your questions, there is no overlap with our LEC area. We already have the cable franchise and overlaps with our LEC area. So we will be actually competing against either Frontier, Verizon or NTELOS are the LECs in the areas that we’re acquiring. So when you look at, at the penetration we’re acquiring approximately 52,000 households pass with almost 18,000 customers. So it's a relatively low penetration, and I think it’s really a function of fact that they had a weak line up, they haven’t offered high definition and in most of the area they only offer the single service. So we believe that it's very, very feasible to see the penetration in those areas meet and hopefully exceed the national averages.

One of the advantages that we do have in many of these areas in West Virginia is the terrain where the customer actually cannot have satellite service, because they don't have a clear view of the southern sky. It's many of these communities are located, virtually in a valley where a portion of the community may have access to satellite service, but a number of the customers do not. That we saw that as an advantage in looking at these franchise areas. As far as CapEx, we don't have specific numbers yet, but we're anticipating that the number will be something less than $500 per home pass that we'll have to invest in that property.

Tim O'Brien – Crow Point Partners

Okay. Thank you. And Ric already touched on the balance sheet metrics, can you give us some idea of – obviously you had ample debt capacity, but what's your – is there a degree of leverage which you begin to lose comfort that you can share with us?

Adele Skolits

I don't have a specific amount to share with you, obviously, we have a long way to go – we believe before we get anywhere close to that. And what we are undertaking now certainly does not put us at the threshold there.

Tim O'Brien – Crow Point Partners

Okay. And one final question. Could you give us some idea of your anticipated timing – of your anticipated peak CapEx?

Adele Skolits

I'm sorry, I misunderstood. Peak CapEx?

Tim O'Brien – Crow Point Partners

Yes. When do you anticipate your CapEx is going to be roughly?

Adele Skolits

That's actually this year. The total CapEx budget for this year is approximately $70 million. We believe this is the high water mark.

Tim O'Brien – Crow Point Partners

Great. And what was the CapEx in the second quarter?

Earle MacKenzie

It was I believe somewhere between $12 million and $15 million, we don't have that number right in front of me. Most of our CapEx is actually being back end, because of the cell sites and the EVDO that we have planned for the third and fourth quarters. We have right now for instance we have over 30 cell sites under construction, all of which will come up in this quarter, and additional ones coming up in the fourth quarter.

Tim O'Brien – Crow Point Partners

Thank you.

Operator

(Operator instructions) We have no further questions in queue.

Adele Skolits

Very good. Thank you, everyone for participating. I'd like to extend an invitation to each of you to let me know if there are additional details you would like us to share in our regular quarterly filings. We want to provide as much meaningful data as we can so let us know what is important to you in order to better understand our businesses. My contact information was provided in the press release. Thanks again.

Operator

This concludes your Shenandoah Telecommunications call. You may now disconnect your lines.

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 Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts