Jul 29, 2009
Executives
Adele M. Skolits – Vice President of Finance & Chief Financial Officer Christopher E.
French – President and Chief Executive Officer Earle A. MacKenzie – Executive Vice President & Chief Operating Officer
Analysts
William Lauber – Sterling Capital Management Charlie Kesio – Raymond James
Operator
Good day and welcome to the Shenandoah Telecommunications second quarter 2009 results conference call. Today’s conference is being recorded.
At this time I’d like to turn the conference over to Ms. Adele Skolits.
Please go ahead ma’am.
Adele M. Skolits
Good morning and thank you for joining us. The purpose of today’s call is to review Shentel’s results for the quarter ended June 30, 2009.
Our results were announced in a press release distributed last night, 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 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 will 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 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 are strongly encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements.
Except as required by law we undertake no obligation to publicly update or revise any forward-looking statement. Also, in an effort to provide useful information to investors, we note on slide three 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 this presentation. I’ll now turn the call over to Chris.
Christopher E. French
Good morning everyone and thank you for joining us. The second quarter of 2009 was another good quarter for Shentel.
While economic conditions remain weak, our wireless business continues to grow and we are positioning the company to offer expanded services in the cable markets we have acquired. The member owners of the small telephone cooperative we offer to purchase have approved the acquisition.
This telephone system is near our existing local telephone operations and our fiber networks and we are excited about the prospect of bringing high-speed broadband service to this community. As you can see on slide five, on a consolidated basis we are reporting net income of $6.7 million for the quarter, compared to net income of $7.2 million from the second quarter of 2008, a decrease of 7%.
Net income from continuing operations was $6.8 million for the quarter as compared to $8 million in the second quarter of 2008. The results for the second quarter of ’08 included $0.6 million after-tax of non-recurring wireless income related to prior period USF fees received from Sprint Nextel.
The second quarter of 2009 included after-tax losses of $0.7 million for the newly acquired Cable TV operations. We expected to incur these Cable TV losses, while we rebuild the networks and launched new services, which in turn should create long-term value.
We are now in the final stage of the sale of our Converged Services operations, while not the best market conditions for a sale. We've been placed with the interest in these assets and expect to be able to execute the sale in the third quarter.
On slide six, we've listed the significant initiatives we currently have underway. Progress continues on our upgrades to the cable systems we acquired from Rapid Communications with work completed on the larger system in Covington, Virginia.
On the PCS side, we added 13 additional cell sites in the second quarter as well as adding EVDO capabilities to 41 additional sites. EVDO is now available to 94% of our covered POPs.
In March, we announced an agreement to purchase the telephone assets of North River Telephone Cooperative, a 1,000 access lines cooperative in Northern Augusta County, Virginia. The Co-op members voted in June to approve the sale.
As we discussed last quarter, we already have the significant investment in the infrastructure needed to provide them advanced telecommunication services. We believe we can profitably offer these same services to North River customers more efficiently and cost effectively than the Co-op can do on its own.
We have already formulated our plans for upgrading this network and we'll work quickly once regulatory approvals are received and the purchase is final, which we expect this fall. Economic conditions continue to impact our growth rates it is still unclear as to how long or deep this recession maybe.
Our gross additions are on par with the second quarter of 2008. While our churn rate is up over the same quarter last year, we experienced a slight reduction in our churn rate over the first quarter of 2009.
Shentel's conservative financial position enables us to remain long-term in our decision-making while quarters like this one are not taken lightly we remain committed to building long-term value and continue to invest in capital projects, which we believe will help achieve that goal. I will now turn the call back to Adele to review our financial results in more detail.
Adele M. Skolits
Thank you, Chris. I will begin on slide eight.
As Chris mentioned we are pleased with our second quarter results including the results of discontinued operations, earnings per share was $0.29 for Q2 '09 in comparison to $0.31 for Q2 '08. For Q2 '09 earnings per share from continuing operations was $0.29 in comparison to $0.34 for Q2 '08.
The company continues to deliver solid returns to shareholders. On slide nine, operating income for Q2 '09 was $11.6 million or down $2 million from Q2 '08.
Wireless operating income was flat, but we've had solid gains and revenues. Average PCS customers are at 9% and gross revenues before credits, Sprint fees and write-off are up by 14%.
However, in Q2 '08 we've recorded non-recurring revenue of $1.1 million related to USF fees received from Sprint related to prior periods. The operating costs associated with enhancing our PCS network at a $0.5 million to PCS operating costs in Q2 '09 over Q2 '08.
As we have discussed in previous earnings calls we incurred additional operating costs related to the additional enhanced cell sites in advance of the incremental revenues they produce. In the short run, these increased expenses will reduce the margins in the wireless segment.
In the longer term, we expect that the margins will grow as a result of the additional data revenues and the additional customers in the new coverage areas. We have continued to upgrade our wireline networks, as Earle will review in a moment.
The increased depreciation associated with these enhancements is the primary reason wireline margins are down by $0.7 million over Q2 ‘08. In December 2008, we acquired cable operations from Rapid Communications.
We are in the process of upgrading these operations while in the long run these enhancements will give us the opportunity to significantly increase penetration and revenues per customer through our expanded services. They will continue to incur operating losses in the near-term accounting for $1.1 million of the $1.2 million increase in the operating loss of our Cable TV operation.
On slide 10, we have shown our calculation of OIBDA, after adjusting from the non-recurring USF fee income OIBDA was up $0.7 million for Q2 ‘09 over Q2 ’08. Cash flows on a consolidated basis appear on slide 11.
Net cash from operations increased by $11.2 million in Q2 ’09 over Q2 ’08. Capital spending and other investments increased by $5.4 million in Q2 ’09.
Primarily as a result of network improvement projects, we expect the significant PCS network enhancements and the upgrade of the acquired Cable TV assets to continue through this year. Our existing credit facilities and cash flow from operations are expected to be adequate to support these projects and our other capital expenditures.
As a result of making voluntary payments the amount drawn against the $52 million debt facility with CoBank is down to $14.7 million at June 30, 2009. The terms allow us to access the undrawn portion of the facility through December 31, 2009.
While we do have the option of moving from a variable to a fixed interest rate we have not chosen to do so this is something we continue to monitor. The debt carried a variable rate of 2.86% at June 30, 2009.
Once again please keep in mind that Shentel is still in the process of closing our defined benefit pension plan and will be distributing its assets. We have requested a technical advice letter from the IRS with respect to the forfeited benefits of unvested former employees.
We cannot predict due to delays created by the further IRS review when this plan will be terminated. When the final IRS approval is received and the assets are distributed we expect to record an incremental $3.6 million of expense related to terminating the plan and make a payment of $2.4 million to fund the full liability to employees.
These numbers are as of the quarter ended June 30, 2009. We expect these amounts to increase approximately $100,000 per quarter this year.
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 A. MacKenzie
Thanks, Adele. Good morning.
As shown on slide 13 in spite of the current economic conditions we continue to have net growth in our wireless operations and are reporting total wireless customers at June 30 of 216,067. On slide 14, the number of gross additions in the second quarter of 2009 was inline with the same period last year, but the increase in churn from 1.74% in 2008 to 2.07% in 2009 resulted in fewer net adds at 3,013.
In light of the condition of the economy, we are encouraged that churn improved slightly from the first quarter of 2009 and that our bad debt expense in the second quarter of 2009 is a 11% lower than the same quarter in 2008. Slide 15 reflects the impact of our continued EVDO build-out.
Gross billed revenue per subscriber was $55.84 with $18.35 of the total from data. At $18.35 data ARPU has increased by $4.83 from a year ago and $0.36 from the first quarter of this year.
With fewer sites let to upgrade EVDO during the rest of this year, we expect the rate of data revenue growth will slow. Slide 16 shows the components of our PCS revenue to reconcile from gross billed revenue to the net revenue recorded by the company.
Both bad debt and service credits are down not only as a percent of billed revenue, but as absolute amounts. The increase in management and service fees are consistent with the 14% increase in net-billed revenue.
On slide 17 we list the top selling price plans and equipment during the second quarter. Again this quarter almost half of our gross additions took one of our three highest revenue rate plans.
This focus on selling premium plans is the reason we've been able to retain an ARPU in the mid-50s and have continued to see an increase in data ARPU. Again this quarter the LG Rumor, Samsung Rant, and the LG Lotus are among the top selling phones.
They were joined by the Samsung HighNote, approximately 9% of all devices sold in the quarter were mobile, data cards. We saw a drop in the number of instinct sold and although we sold all the Palm Pre phones in our inventory we had a limited number to sell.
Slide 18 reflects our wireline customers. Once again this quarter we had modest access lines losses we end of the quarter with 24,046 access lines.
As mentioned earlier the members of the North River Telephone Cooperative approved the sale of their telephone assets to Shentel at a Membership Meeting at the end of June. We have filed for approval from the Virginia State Corporation Commission and expect that we will get approval and we will be able to close the transaction in the third quarter adding approximately 1,000 access lines.
We continue to see growth of DSL connections in our LEC area. At June 30, we had 10,526 DSL customers, which represents an over 43% penetration of access lines.
The majority of our DSL customers have 1.5 meg at $34.95 a month or higher speeds. We will continue to offer higher speeds with current construction in their way that will provide the availability of up to 10 meg speed to over 95% of our telephone customers.
We continue to see a loss of dial-up customers to high-speed alternatives. Those inside our telephone service area migrate to our DSL product, but we have no high-speed alternative to offer customers outside of our telephone footprint.
We plan to continue to support the dial-up product for the segment of the population not ready to make to jump to high-speed. We've been very active working on cable properties we acquired in December.
We have performed some much-needed maintenance and have stabilized the customer losses in advance of upgrading the networks. During the second quarter we successfully completed the transition to our billing and back-office systems.
In June, we completed the upgrade of the systems in Alleghany County and Covington, Virginia. This is our largest market and had the least amount of work to upgrade.
In the past few weeks we have launched our marketing and sales campaign offering an expended video lineup, High Definition, DVR service and multiple Internet speed options. We are encouraged by our initial success.
Work continues to rebuild the properties in West Virginia, where we extent of the efforts will be more extensive. We will launch Petersburg, West Virginia in August and numerous other markets in the fourth quarter.
We are benefiting from the synergies of our current cable assets the head-end that serves our customers in Shenandoah County will also serve by a new fibre build the Petersburg and Franklin, West Virginia markets therefore eliminating the need to build the new head-end. On slide 19 you see that cable subscribers have remained flat from the beginning of the year.
This reflects our success at slowing the loss of customers in markets with interior networks and the initial success of our sales efforts. Not reflected on the hundreds of existing customers in the Covington market that upgraded their video package and added internet.
Once we have a meaningful number of Internet customers we will provide the details of the Rg use. Before I turn it back over to Adele I would direct you to slide 20, which summarizes the capital expenditures we've made last year, year-to-date and expect to make for 2009.
You see that to-date we have committed and spent $30 million and expect to spend a total of 64.6 million by year-end. This is inline with 2008, which was a record year for Shentel.
Chris discussed earlier our decision that in spite of the recession we believe that it’s the right long-term decision to continue to expand our networks. To-date in 2009, we have put 21 new cell sites into service for a total of 432.
We anticipate that we will add an additional 54 sites before the end of the year for a total of 496. The new sites provide us additional capacity to retain our superior operating metrics and continue to move us towards coverage, parity in Central Pennsylvania.
As of June 30, we've added EVDO to 278 sites and expect to add an additional 60 before year-end. The capital spend in wireline is for additional fibre capacity on existing routes, extending our fibre network, the anticipated cost of operating DSL in North River Telephone area, increasing the broadband speeds available to our telephone customers and preparing to move all of our voice traffic to a soft switch by year-end 2010.
The 19.3 million for cable, as I have discussed earlier is for the two-way upgrade and the ability to launch triple play to our cable customers. This is a very aggressive plan, but to-date we have not encountered anything, but few delays and a few unexpected conditions.
I will now turn it back over to Adele.
Adele M. Skolits
This concludes our prepared remarks. Laurie, would you review the instructions for posing a question.
Operator
Certainly. (Operator Instructions) And we will go to Will Lauber with Sterling Capital Management.
William Lauber – Sterling Capital Management
Yes. On the wireless side trend you, as reconciled, I see the billed revenue per subscriber is going up a little bit and the data portion is going up a lot, but the voice is going down is it been driven mainly by the Simply Everything plans that there is a greater proposition that is allocated to the data side?
Christopher E. French
That’s true. We have a combination plan that offers unlimited voice and data or very large buckets of voice and data.
We allocate 30% of the revenue to data and 70% of the revenue to voice.
William Lauber – Sterling Capital Management
Okay. And, I'm guessing that when you said that you expect, I guess going forward do you expect the data portion, the growth to slow down is that…
Earle A. MacKenzie
Yeah. It's Earle MacKenzie.
We do expect it will primarily because we've reached the point where now 94% of our customers have access to 3G and we see a pent-up demand as we add new locations and data usage jumps, but now that we are reaching kind of full penetration it will only really be on going as we add new customers and existing customers find new applications that they can use the 3G network. So, we expect it will continue to grow, but certainly not at $4.83, which was the increase over the same period last year.
William Lauber – Sterling Capital Management
Okay. So, I guess what I'm still kind of unclear about is when you guys did the business case to spend this money for the upgrades, did you take into account that, at the time that Sprint Simply Everything plan was coming out.
I guess I'm just trying to figure out, did you build revenue subscriber, are you hoping to get that up to $60 or what’s kind of might be amount, where all these investments made sense?
Earle A. MacKenzie
Well the plan to actually build-out this network started long before Sprint announced the Everything plan, the lead time is fairly significant in doing the planning, but we did anticipate that there were many more applications coming online that people would need and want more broadband services and therefore we saw the need just as we are in our wirelines business of continuing to build the network to offer higher and higher broadband speeds. As far as what average revenue will turn out to be in total, we don’t anticipate it to be, to grow significantly over the mid-50s, which is we are kind of at the top and inline with most of the, with all of the other large players.
We do can see shift between voice and data, as people are texting rather than making a phone call that is why we are seeing the voice part of our revenue continue to decrease obviously making the EVDO investment has proven to be a very good decision on our part, because it has allowed us to continue to stay at the top of the average data ARPU in the industry.
William Lauber – Sterling Capital Management
Okay. Okay.
So, I guess it would be safe to say I guess the business case was, would be build more on just being competitive with the industry and not losing market share as opposed to we are going to make this investment and we have to get this much additional revenue and EBITDA out of it.
Earle A. MacKenzie
Well I think probably both is correct I mean we are, need to stay competitive, but if you look at our data revenue, compared to others who have not made the EVDO investment there is a significant delta between our data ARPU and theirs. So, I think that in both cases its proved to be a good decision on our part.
William Lauber – Sterling Capital Management
When your friend or other people would be the other companies that having an agreement with Sprint or where we you…
Earle A. MacKenzie
No its just really if you look at carriers across the board, some have been more aggressive than others at building out their 3G networks.
William Lauber – Sterling Capital Management
Okay. Okay, that’s it for now.
Thank you.
Adele M. Skolits
Thank you, Will.
Christopher E. French
Thank you, Will.
Operator
(Operator Instructions). We will go next to Charlie Kesio with Raymond James.
Please go ahead.
Charlie Kesio – Raymond James
Hi. This is Charlie sitting in for Rick Prentiss.
How are you guys?
Adele M. Skolits
Good morning, Charlie.
Charlie Kesio – Raymond James
Good.
Adele M. Skolits
Hear from you?
Charlie Kesio – Raymond James
Let me ask, have you guys put on any further thought into positively launching your own prepaid offering?
Earle A. MacKenzie
Charlie its Earle MacKenzie. We have continued to look at that, but from a practical standpoint, from the size of our footprint and the fact that we don’t have the wireless infrastructure in-house, we basically as you well know as a Sprint affiliate use Sprint's billing platform and their customer service.
The incremental cost of us building the back office and having the support on a limited footprint of 2 million POPs really we just can't come up with, making the economics work. So rather than dividing our attention, we have made the decision at least up to this point to continue to focus on the postpaid and grow that business.
Charlie Kesio – Raymond James
Okay I understood. Then I guess switching more towards the high end, you were mentioning during the quarter Palm Pre supply was obviously limited, and, Sprint was, clearly saying, something along the same lines.
What about currently, are you guys getting them into the stores or is it still kind of spotty?
Earle A. MacKenzie
The supply has gotten better, we still are able to sell pretty much every one that we get. So the supply in July has been better than June, but still significantly below where we would like it to be and we've been informed that that it will continue to improve throughout the rest of this year.
So it's very, very important for us obviously for the fourth quarter to have a good supply of the phones that folks want.
Charlie Kesio – Raymond James
Right, okay. And final question in terms of Converged Services, obviously you guys were saying you are in the final stages there do you have any type of timeframe like before the end of the quarter or anything like that further to close on the sale?
Adele M. Skolits
We certainly are hoping to close in the third quarter.
Charlie Kesio – Raymond James
Okay. Great.
All right. Thank you guys.
Christopher E. French
Thank you, Charlie.
Adele M. Skolits
Thank you, Charlie.
Operator
And with no other questions in queue, I would like to turn the conference back over to Ms. Skolits for any additional or closing comments.
Adele M. Skolits
Thank you for participating. As usual I would like to extend an invitation to each of you to let me know if there are additional details you would like to see on future calls.
My contact information was provided in the press release. Thank you.
Operator
That does conclude today's conference. Thank you for your participation.