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Edited Transcript of SHEN earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Shenandoah Telecommunications Co Earnings Call

Edinburg May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Shenandoah Telecommunications Co earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher E. French

Shenandoah Telecommunications Company - Chairman, President & CEO

* David L. Heimbach

Shenandoah Telecommunications Company - Executive VP & COO

* James F. Woodward

Shenandoah Telecommunications Company - Senior VP of Finance & CFO

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Conference Call Participants

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* Amy Yong

Macquarie Research - Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Sergey Dluzhevskiy

GAMCO Investors, Inc. - Associate Portfolio Manager

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

* Jennifer Belodeau

Institutional Marketing Services, Inc. - VP

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Presentation

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Operator [1]

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Good morning, everyone. Welcome to the Shenandoah Telecommunications First Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Belodeau of IMS and Investor Relations for Shentel.

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Jennifer Belodeau, Institutional Marketing Services, Inc. - VP [2]

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Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's results for first quarter ended March 31, 2019. Our results were announced in a press release distributed this morning, and the presentation we'll be reviewing is included on our Investor page at our website, www.shentel.com.

Please note that an audio replay of this 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 Chris French, President and Chief Executive Officer; Dave Heimbach, Executive Vice President and Chief Operating Officer; and Jim Woodward, Senior Vice President, Finance and CFO. After our prepared remarks, we will 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 the statements. Hence, we provide a detailed discussion of various risk factors in our SEC filings, which you are 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.

With that out of the way, let me turn the call over to Chris. Go ahead, Chris.

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Christopher E. French, Shenandoah Telecommunications Company - Chairman, President & CEO [3]

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Thank you, Jen. Good morning, everyone. Appreciate you joining us. We continue to deliver solid results in the first quarter of 2019 with consolidated revenue growth and significantly increased operating income. During the quarter, we saw strong operating metrics across our business. We achieved record first quarter customer growth driven by all-time high first quarter additions in both our Wireless and Cable businesses. The ongoing investments we've been making in our strategic expansion and upgraded network have been paying off. We're strengthening our position as the most reliable provider in the areas we serve with the capacity and speed to exceed customer expectations.

We continue to follow the progress of the proposed Sprint/T-Mobile merger. We're optimistic that our long-standing affiliate agreement with Sprint position Shentel well for whatever outcomes reach. We believe the merger would establish a formidable competitor as an alternative to the dominant AT&T and Verizon. Regardless of the outcome, we are well positioned to provide exceptional service to meet the wireless needs of our customers. Our focus remains on continuing to grow our business while remaining vigilant about sustaining long-term value for our shareholders.

Moving to our results on Slide 5, we summarize some highlights of our performance for the quarter. Revenue grew 3.1% to $158.8 million as compared to $154.1 million in the prior year period. Operating income increased nearly 48% to $24.8 million versus $16.8 million in 2018. Net income for the quarter was $13.9 million or $0.28 per basic and diluted share compared to $6.6 million or $0.13 per basic and diluted share in 2018. Adjusted OIBDA for the quarter increased 6.3% to $73 million, representing a margin of 45.9%, an increase from an adjusted OIBDA margin of 44.6% in the first quarter of last year.

In our Wireless highlights on Slide 6, you'll see the postpaid customers were up 3.4% and prepaid customers increased 6.8% compared to the first quarter of 2018. Wireless operating revenues increased 2.5% to $115.7 million primarily driven by organic growth in postpaid and prepaid customers. Adjusted OIBDA for the Wireless segment increased 7.4% to $61.8 million.

Moving to Slide 7. Revenue in our Cable segment increased 6.3% to $33.7 million primarily due to growth in broadband and video rate increases implemented in the past through higher programming costs. Cable adjusted OIBDA for the first quarter grew more than 3% to $12.1 million compared to $11.7 million in 2018 primarily driven by improved broadband ARPU.

On Slide 8, Wireline operating revenue and adjusted OIBDA declines were primarily due to the repricing of backhaul circuits in migrating wireless voice traffic from circuit-switched facilities to more cost-effective VoIP facilities. While this impacted Wireline revenue unfavorably, it had the benefit of lowering operating cost in our Wireless segment.

Before I close my remarks, I would like to take a minute to recognize and thank Jim for his contributions and leadership at the company. He's leaving us after successfully reorganizing our accounting and finance department and strengthening our financial reporting processes and procedures. He also renegotiated our credit agreement on favorable terms and has helped position us well for our continued growth. We wish him the best in the next chapter of his successful career.

We're pleased to be off to a strong start in 2019. This year will be a year of change and transition, but we are well positioned to continue growing and delivering shareholder value.

I'll now turn the call over to Jim to review the details of our financial results.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [4]

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Thank you, Chris, and good morning, everyone.

We show the changes in our quarter results on Slide 10. First quarter revenue was $158.8 million compared to $154.1 million in 2018 driven by the Wireless and Cable operations. We reduced consolidated operating expenses by 2.4%, down $3.3 million from last year's first quarter, primarily due to a decline in network costs for the Wireless segment related to the repricing backhaul circuits and migrating voice traffic from traditional circuit-switched facilities to the more cost-effective VoIP facilities. The decrease was partially offset by higher costs for the Cable segment primarily due to the deployment of higher speed data access packages and infrastructure investments necessary to support the expansion of our growing cable and fiber networks.

Operating income increased $8 million or 48% to $24.8 million over the prior quarter. Net income increased to $13.9 million or $0.28 per basic and diluted share compared to $6.6 million or $0.13 per basic and diluted share in the first quarter of 2018.

Moving to Slide 11, you will see first quarter adjusted OIBDA results by segment, which illustrates the components driving the quarter-over-quarter change. Adjusted OIBDA for the quarter was $73 million, representing a margin of 45.9%. Continuing OIBDA increased 6.2% to $63.3 million.

As a reminder, when we acquired nTelos, Sprint committed to waive the 8% postpaid and 6% prepaid management fees, up to $4.2 million a month, until the total waived management fee reaches $255.6 million. We expect to receive the benefit as a waived management fee through 2022.

On Slide 12, we provide a detailed breakdown of the change between first quarter 2018 and '19 for Wireless adjusted OIBDA, which increased $4.2 million driven primarily by strong postpaid and prepaid subscriber growth.

On Slide 13, we provide a bridge of the drivers and changes in Cable adjusted OIBDA, which grew about $400,000 in the quarter primarily as a result of increases in broadband service revenue.

Over-the-top video is driving broadband consumption, resulting in our customers requiring additional broadband capacity and consistently driving our improved broadband revenue. The Big Sandy integration is going well, and we're pleased to enhance our coverage and service capabilities with an increased presence in Kentucky.

Slide 14 shows the bridge between 2018 and 2019 first quarter Wireline adjusted OIBDA, which decreased during the quarter primarily driven by the affiliate backhaul circuit repricing.

Turning to our capital metrics on Slide 15. As of March 31, 2019, we had $751 million of debt outstanding. During the first quarter, we reduced debt by $20 million, including a voluntary $15 million prepayment. Our leverage ratio as of March 31, 2019, was 2.42x, well inside our debt covenant of 3.5x. And barring any significant acquisitions, we expect our debt levels and leverage to continue to decline.

And now I'll turn the presentation over to Dave.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [5]

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Thanks, Jim, and good morning, everyone. I'll start by going over some of our operational highlights from the first quarter of 2019 where we saw a record year-over-year organic Wireless subscriber growth, adding 26,000 postpaid and 17,000 prepaid Wireless subscribers.

In our Cable segment, we added 6,400 broadband subscribers while growing broadband ARPU 5.1% year-over-year. We also continue to make significant progress, building out and enhancing our state-of-the-art networks. In our Wireless segment, we added LTE capacity at over 120 sites, and we constructed 21 new sites and continue to deploy features to enhance our customers' data experience, including inter-band carrier aggregation and 256-QAM modulation.

In our Cable and Wireline segments, we added over 158 route miles of fiber, and we're on track to have all of our Cable systems upgraded to DOCSIS 3.1 technology and gigabit speeds by the end of the year.

On Slide 17, we show the components of change in our Wireless customer base year-over-year. We had approximately 801,000 postpaid and 267,000 prepaid subscribers at the end of the first quarter for a total of 1.1 million Wireless subscribers. Net additions for the first quarter were 5,776 for postpaid and 8,516 for prepaid. Combined these net ads were the highest organic net gain for any quarter.

We continue to have a positive port-end versus port-out ratio at 1.14:1 for the first quarter of 2019. We finished March with 163 branded Sprint stores and 162 Boost stores, representing an increase of 9% and 22% year-over-year, respectively.

Lastly, 7% of our base upgraded their device in the quarter, and 9.8% of the postpaid base is now comprised of tablets and data devices.

On Slide 18, you can see the growth in both gross and net activity occurring in postpaid with both metrics at an all-time high for our first quarter. Postpaid churn for the quarter was 1.89%, consistent with prior year. However, it's important to note that account-level churn actually reduced year-over-year by 13 basis points, which was wholly offset by an increase in line mobile churn as promotional rates expired on heavily discounted or free lines.

We're proud of these improvements in account-level churn, which, taken together with heavily discounted or free-line level attrition, should over time continue to contribute to the stabilization of postpaid ARPU, which declined only slightly year-over-year from $43.22 to $42.81.

We'd also like to highlight that the postpaid subscriber adds that we see are almost all new revenue-generating lines with no material level of free lines or postpaid subscribers switching from prepaid service. And then only roughly 5% of our postpaid base is subject to add-a-line promo roll-off.

Moving to Slide 19. Prepaid gross add increased to 40,979, and net adds were 8,516 compared to first quarter of 2018, which included approximately 16,000 net adds from the Richmond sliver territory expansion. Prepaid ARPU increased year-over-year from $36.73 to $37.73 primarily due to the higher mix of higher ARPU Boost subscribers.

During the same period, prepaid churn declined from 4.42% to 4.14%, driven by a 21-basis point improvement in Boost churn, reflecting a result of higher postpaid port-ins, more and upgraded stores, dealer commission incentives to reduce early life churn and increased marketing.

Now moving to Cable on Slide 20. Total RGUs grew 4.5% to 139,504 compared to 133,439 in the prior year primarily due to the addition of approximately 4,800 subscribers through the acquisition of Big Sandy broadband. In the first quarter, we added approximately 6,400 broadband and 1,100 VoIP subscribers compared to the prior year, which was partially offset by a decrease of 1,400 video subs. 65% of the net broadband growth was organic. Both average revenue per RGU and per customer continued to show improvement in the quarter driven by a combination of broadband speed upgrades and annual video price increases. We're pleased to report that our broadband penetration increased from 35.2% in the first quarter of last year to 37.7% this quarter. So we are making solid progress, but of greater significance is the tremendous market opportunity ahead of us to continue to grow our broadband penetration.

To that end, over 70% of homes passed are now capable of broadband speeds up to 1 gig per second with approximately 17% of our base in the upgraded areas having migrated to our new PowerHouse-branded rate card, which provides our customers with higher speed and data allowances while minimizing ARPU erosion. Our goal is to construct the deeper competitive mode in our cable markets by migrating the base over time to higher speeds out of the reach of satellite, fixed wireless and DSL, while continuing to provide the great local service our customers have come to expect from Shentel.

Lastly, Slide 21 provides an update to capital spending. In the quarter, total CapEx was $44.4 million. Approximately $26.5 million of this spending was driven by investments in our Wireless segment, including continued expansion in our acquired markets and network capacity augments. Cable and Wireline investments accounted for $16.8 million and were primarily driven by the expansion of our fiber network and ongoing DOCSIS 3.1 upgrades. Our $150 million budget for the year now includes approximately $2.1 million for integration cost and network upgrades in the recently acquired Big Sandy broadband markets.

So thank you very much. And operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ric Prentiss of Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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A couple of questions. First, on the quarter, can you break out for us how much of the postpaid were phone versus nonphone adds in the quarter with Sprint? Obviously, it continues to lose subs on the phone side, but I assume you guys had a nice quarter on the phone side as well.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [3]

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Yes, Ric, this is Dave. So a couple data points for you there. The Internet of Things category, tablets, watches, et cetera, represented 26% of our gross adds in the quarter. But interestingly, phone gross adds were also up 3% year-over-year, and add-a-lines were roughly 80% of those IoT activations as you might expect. But with that said, add-a-lines are roughly 35% of our gross versus almost 2x that for Sprint, since you mentioned Sprint. And I might point out that last year, our Q1 phone net result was slightly negative as well. So on a net basis, the increase in postpaid that you saw in the quarter was driven primarily by Internet of Things.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Okay. And so did you have positive postpaid phone adds in the quarter, net adds?

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [5]

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They were down about 625 units, so basically flat, Ric.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [6]

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And an improvement over prior year.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [7]

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Exactly, exactly. This just -- it helps to break out the phone versus the nonphone, just different ARPU levels, obviously.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [8]

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Yes.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [9]

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Yes. And speaking of gross adds, you talked about how gross adds were up on postpaid phone as well as wearables and other. How should we think about, first, the seasonality of gross adds? But second, it's pretty strong levels. So I assume that's reflecting the network and the stores. But how should we think going forward from this 51,000 postpaid gross add level?

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [10]

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Yes. Look, we're -- we continue to be bullish on our ability to grow the Wireless subscriber base, which is why we continue to invest elevated amounts of capital in the network, particularly in the expanded areas. And Ric, an interesting thing, I think, has happened over the last couple of quarters for us in terms of wearables is that we've seen -- particularly with the newer version of the Apple Watch, we've seen a lot of folks demanding that product. And with Sprint's add-a-line promos, it's natural that they would. And so we have seen a little bit more of a shift in our neck of the woods that we've had to respond to. And as I think, historically, we have downplayed the sale of wearables in our retail footprints through our commission plans and incentives that we provide our reps, and we still deemphasize that, but it's really the consumer demand that's driving that.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [11]

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Yes. Okay. And last one for me. Sprint on their call on Tuesday night mentioned they're hoping to see -- during the last -- late stages of the decision, Deutsche Telekom today said maybe a federal decision in June on the Sprint/T-Mobile merger. On the Softbank call this morning and on the Sprint call, it's been alluded to that if the deal's not approved that they might need to reduce their coverage area. They might need to close stores. They might need to become less of a nationwide-focused operator, if the deal is not approved. How does that affect you guys? If Sprint kind of changes their tactic, if the deal is not approved to narrow their "geographic focus"?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [12]

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Hey, Ric, this is Jim. So obviously, it will depend on what they actually do. But just thinking through the list of things you did, I'm not sure that it impacts us because we are geographically focused. And we are -- and we do have a strong -- a very strong network and growing, and it's both its coverage and capacity to provide our customers, as good as services that they can get from any carrier out there. So just right off the top of my head, Ric, I wouldn't say that the changes that they might have to make in other parts of the country wouldn't -- I don't see how the things you listed would really have an impact on what our game plan is and our outlook is.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [13]

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Unless they want to shift more to you guys, and that might key up the...

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [14]

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Oh, well, no. If they come to us, and they want to talk about additional geography, then yes, that would obviously. But I was just thinking about with the current geography that we own. But yes, if they come to us with additional geography, depending on how they position their longer-term plans, we then would have to factor into that conversation.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [15]

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Okay. And where are you guys comfortable with leverage going? You mentioned leverage -- debt leverage are coming down without significant M&A. But where are you comfortable with M&A did occur having leverage head up to?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [16]

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I don't -- it really would depend on when it goes up, how fast it comes down and what the modeling goes. But obviously, we've got a churn or 2 that I don't think anybody would lose any sleep over, depending on what that economic opportunity was. I mean we're still inquisitive in trying to grow our broadband assets. And there has been a little bit of movement there in that market. There are some things that are -- seem to be coming together as we expect that they would with maybe the change in tax laws and folks realizing that scale is the name of that game. So it's not just wireless expansion. But to continue to balance and diversify the portfolio, we're also interested in broadband.

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Operator [17]

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And our next question comes from Amy Young of Macquarie.

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Amy Yong, Macquarie Research - Analyst [18]

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And Jim, best wishes. Dave, I guess, just following up on your comments on churn. Can you quantify how much churn was attributable to Sprint and then more disciplined promotional activity? And should we see the same impact for the magnitude going forward until they change their (inaudible) promote? And the second question is (inaudible) continues to grow nicely. How much more room is there for ARPU to increase? And where do you feel like you can get (inaudible) rates to?

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [19]

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Amy, quick clarifying follow-up because you were kind of cutting in and out on the phone connection there. Was your ARPU question on broadband?

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Amy Yong, Macquarie Research - Analyst [20]

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Yes.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [21]

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Okay. No problem. So first of all, on churn on the Wireless side, that -- the way you phrased that question is a tough one to answer. We don't -- it's really hard for us to kind of dig into exactly how much churn is tied to what the various promotional activities Sprint undertakes. What I can tell you is, I mentioned in the script and I'll reiterate here, that we have fairly small exposure to the add-a-line roll-off promo churn given that, that's only -- it's less than 10% of our -- it's actually closer to 5% of our postpaid subscriber base. So we feel pretty good about that.

The other thing I'd tell you is that whereas even 12, 18 months ago, roughly 2,000 gross adds a quarter we're adding free lines that that's down to less than roughly 500 a quarter now. So that the exposure is also dropping substantially over time, which we feel good about as well. So from our perspective, while we can't control the promotions that Sprint runs, we try to do our best through credit policy management and through our incentives and -- at point-of-sale to drive the kind of subscriber acquisition and the kind of device acquisition that we prefer that will reduce churn longer term.

On ARPU in the broadband space, we have historically had very healthy broadband ARPU gains, but I think that was, in large part, due to our legacy broadband rate card. As we have rolled out these DOCSIS 3.1 upgrades, we launched a new rate card that provides far greater speeds for better pricing for our customers, and we have raised data allowances. So my interest at this stage of our journey is more around growing penetration and trying to balance that with not giving up ARPU. And that's the balance that we are currently trying to strike. So from a go-forward basis, I would ask you not to expect us to grow broadband ARPU 10% year-over-year or something like that, which is, I think, what we did last year because we are in the process of leveraging our speed upgrades to -- that's in the script driver, deeper relationship and more long-term relationship with our customers.

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Operator [22]

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And our next question comes from Zack Silver of the B. Riley FBR.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [23]

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Jim, best wishes to you and your next endeavor. The first one is on the Cable side, OIBDA margin stepping down year-over-year in the quarter due to, I think, it was driven by OpEx related to some infrastructure upgrades that you had. And I'm just wondering after some really nice margin growth in 2018 whether this is going to kind of weigh on margin for the balance of '19 and whether we should expect margin growth in the Cable segment this year.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [24]

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Zack, this is Dave, and I'll let Jim chime in, if he'd like as well. But the Cable segment OIBDA margin year-over-year, the data there was driven by really 3 things: onetime subscriber acquisition costs in the quarter and a modest increase in maintenance expense. And then we ran some promotions toward the back half of last year on our legacy rate card, while we were preparing to launch our new PowerHouse rate card that drove some of that negative variance in terms of OIBDA margin in the first quarter this year.

In terms of margin expansion in Cable this year, the way we're managing the Cable segment this year is to reinvest in deepening customer relationships and continuing to grow penetration and to leverage our enormous competitive advantage from our point of view, both with respect to the performance of our products and the service we can provide to drive higher penetration. So this year is really a year focused on deepening customer relationships and growing penetration more so than it is OIBDA margin expansion.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [25]

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Zack, just to pow on to what Dave said, when I look at that and I look the things that are going on there, I don't see anything systemic. I do -- I think, Dave is right. We made -- consciously made some investments to strengthen the relationship, make sure that no matter what alternatives the customer have, we would always be the #1 alternative to -- for broadband. And do that to incentivize the customers and our sales folks. There's some kind of onetime cost. I just don't think that -- look, there is still plenty of growth in that segment.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [26]

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Okay. That's really helpful. And then try one more and following up on Ric's question earlier. Given that Sprint would be, you know, the capital-constrain in the event of a no-deal outcome, I mean, do you have any sense of what their appetite would be to sell your more footprint? And then on the other side of it, what would your appetite be to take on more of their territory at this point?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [27]

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Zack, I'm going to answer that question. But look, I think it will just depend, right, because our appetite's take on additional expansion there is -- and I know this sounds like out of the textbook, but it's a good deal for the shareholders, a good long-term deal for the shareholders. And if it's not, we'll walk away. I mean just similar to some of the broadband opportunities that we looked at, they were good long-term options for our shareholders. And to exactly what Sprint will or won't want to do, I mean, my crystal ball is the same one as yours. I'm not sure what they want to do there. I think we've been a really good partner for them in helping them expand and build their little coverage. So it just depends on how they view the world when they exit the deal without a merger.

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Operator [28]

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Our next question comes from Hamed Khorsand of BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [29]

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So first off, I want to ask you was the growth you're seeing on the Wireless subscriber side, is that coming from -- are you guys opening up more stores? Or is that coming from just being visible and a bigger footprint?

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [30]

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Both. Hamed, this is Dave. Yes, we continue to expand the store footprint as I think you know. And because we've taken on 2 territory expansions over the last couple of years, we have new dirt to dig around in. And as a result of that, we continue to see strong subscriber growth.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [31]

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And is there a threshold where you would actually see some operating leverage from these store openings as they move on? I mean there's lots of startup costs and fixed costs and so forth involved.

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [32]

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Yes. Most of the -- specific to the stores, most of the store openings, incremental store openings we're doing, we're doing through third-party distribution. So the startup costs for us is pretty minimal. The operating leverage question, though, more to the point is a great question, and it's one we spend a lot of time thinking about here at Shentel, and I would submit to you that we see evidence of incremental operating margin every day as we work to reprice backhaul circuits, use our capital to displace external spend associated with things like backhaul. And as we continue to invest in the expansion and upgrade of our networks, we will continue to drive greater operating leverage to drive margins higher over time. But having said that, we are still in growth and expansion mode. And so your ability to see some of that manifest in the income statement, and the short to medium term is going to be somewhat muted.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [33]

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Yes. I want to -- Hamed, we haven't -- we talked about this on previous calls, but it's -- I think it's a good opportunity. The -- as you're growing and expanding the network, you're lighting up a tower, right? And you light up that tower, and you build that network, and then you've got something to go to market with. Well, since you like to power up, it's -- Dave, correct me if I go straight -- if I...

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [34]

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6 round them up.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [35]

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Right. But as I start selling into those subscribers, that's where the real leverage comes. But as you have witnessed and been a witness long time, this investment and the capital takes couple of years to get that to that point. So yes, I think there's opportunity to leverage our CapEx into higher margins because -- but it just -- you got to build the network and you set up your distribution, your sales and marketing gets out there, and you start selling subscribers into those networks.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [36]

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And are you at a point where you could actually like pull out a goal and say reaching 20% operating margin? Or are you still in that just generating dollars versus margin standpoint?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [37]

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Well, are we at a point where we can put out a goal? If we were planning to, yes. But the -- we're still focused on growing and maximizing the territory that we have that we've been -- that we acquired from Sprint, so -- and remaining diligent about the changing competitive landscape at the same time. So it's not just one time.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [38]

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And last question is on the CapEx schedule, and you're spending almost double of what you spent last year for Cable. Is that going to be normalized? Or is that purely because of DOCSIS 3.1 build and that just goes back down next year?

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [39]

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Yes. Hamed, it's just mattering of things that are in that number, but it's principally related to the expansion of -- a continued expansion of our fiber footprint as well as the DOCSIS 3.1 upgrade.

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Operator [40]

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And our next question comes from Sergey Dluzhevskiy of GAMCO.

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [41]

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One follow-up on Sprint/T-Mobile. So given everything that you've said on this call and the headlines that we are seeing, including most recent ones, I mean, at a high level, I guess, what scenarios do you envision if the merger is approved? And what challenges and opportunities do you see if it is rejected? And how are you preparing for this?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [42]

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Sergey, this is Jim. So as we've talked about, if the merger's approved, there is a word fall-off of events that will occur, really starts with the approval of the merger and just kind of revisit as quickly. It starts a clock of about 180 days where we have an opportunity to negotiate whether we are -- remain an affiliate or they purchased the Wireless business and keep -- I want to remind everybody that it's the PCS business, right? It's not the fiber, and it's not the towers. We retain those. So if the merger is approved, I expect that at that point, we'll become a top 10 thing. The T-Mobile needs to do, and they'll reach out, and we'll start a discussion. If the merger is not approved, at some point, as someone else mentioned, I don't know what Sprint will do. They'll have to sit back and make their assessment, but we'll continue to run our game plan and operate our business. And then we'll also be open for business if Sprint would come to us and want to revisit territories (inaudible).

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [43]

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Right. And my second question is on the Cable side as far as inorganic activities. So you guys acquired Big Sandy earlier this year, which was obviously a (inaudible). What is your view of potential cable deal pipeline? I think you alluded to it a little bit. And what are the evaluations that you're seeing? And how are you thinking about an organic growth in Cable going forward? And maybe what are the key criteria for you as you evaluate those potential Cable acquisitions?

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [44]

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So I'll talk a little bit about the acquisition, and Dave can talk about organic. But we are seeing an uptick in the -- as I think about it, the inventory out there folks. Keep in mind, a lot of these Cable companies are probably held, family-owned, and we are seeing an uptick of those things coming to market or interest, and it comes in various ways. Some of them we are seeing in their full-blown processes, and some of them it's a phone call. And Dave and myself are -- in addition to our other roles, we're also the Chief Development Officers for Shentel. And so we're going out there and meeting folks and talking to them and letting them know that when the time comes that they may want to put their asset in some great hands, we want them to know who we are and that we would be a good home for their assets. So we are seeing some uptick in that. I wouldn't say it's a flurry of activity yet, but it is an uptick in the last 6 months. It's mainly conversations that are picking up.

Was there another part of that M&A question you had?

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [45]

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No. Just key criteria for you. Obviously, as you were saying, there's pickup in activities, [you] prioritize certain assets versus others.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [46]

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Well, at this point, prioritization isn't too much of a problem because I'm looking at whatever comes. It hasn't been -- that would be a high-class problem to have. I have so many of them to look at and to try and prioritize them. But look, it's just a financial discipline, right? That's how we're going to decide about what is an accretive deal to Shentel and our shareholders. I mean we -- like I said, we have walked away from a couple just because this is just not going to be good for Shentel. The other thing I would tell you is we're obviously interested in tuck-ins, right, that are geographically adjacent. But we're also -- we're looking at -- we're open to establishing new [beach add] somewhere to run the same playbook that we did kind of here in Central Virginia and West Virginia. So -- but those valuations are accretion, a square share price.

Dave, do you want to...

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David L. Heimbach, Shenandoah Telecommunications Company - Executive VP & COO [47]

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I think you got his questions, yes.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [48]

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Does that answer all your questions, Sergey?

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [49]

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Yes. Thank you.

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Operator [50]

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(Operator Instructions) And I'm not showing any further questions at this time. I would now like to turn the call back over to Jim Woodward for any further remarks.

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James F. Woodward, Shenandoah Telecommunications Company - Senior VP of Finance & CFO [51]

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Well, thank you for joining us today, and thank you for the well wishes. And I know that Dave and Chris look forward to updating you in the future on our continued progress. Take care, and have a great day.

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Operator [52]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.