Q4 2023 Shenandoah Telecommunications Co Earnings Call
Participants
Kirk Andrews; Director, Financial Planning and Analysis; Shenandoah Telecommunications Co
Christopher French; President & CEO; Shenandoah Telecommunications Co
Jim Volk; SVP & CFO; Shenandoah Telecommunications Co
Ed McKay; EVP & COO; Shenandoah Telecommunications Co
Frank Louthan; Analyst; Raymond James
Dan Day; Analyst; B. Riley Securities
Hamed Khorsand; Analyst; BWS Financial
Presentation
Operator
Good morning, everyone. Welcome to Shenandoah Telecommunications Fourth Quarter 2023 earnings conference call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis at Shenandoah.
Kirk Andrews
Good morning, and thank you for joining us for the purpose of today's call is to review Shenandoah's results for the fourth quarter and full year 2023. Our results were announced in a press release distributed this morning and the presentation we'll be reviewing is included on the 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; Ed McKay, Executive Vice President and Chief Operating Officer; and Jim Volk, Senior Vice President of 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 that may cause our actual results to differ materially from the statements. Therefore, we have provided 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.
And with that, I'll now turn the call over to Chris.
Christopher French
Go ahead, Chris Kirk, we appreciate everyone joining us this morning, and I hope everyone is well, 2023 was another strong year for SingTel as we continued executing our Glo Fiber expansion plan. As you can see on slide 4, consolidated revenues and adjusted EBITDA grew approximately 8% and 19%, respectively, driven by Glo Fiber subscriber growth since our first full year of launch in Glo Fiber in 2020, our consolidated revenue and adjusted EBITDA have grown at a compound annual growth rate of approximately 9% and 18%, respectively. We believe this is an industry leading pace among publicly traded broadband companies. As noted on slide 5, we had over 41,700 Glo Fiber subscribers as of December 2023, an increase of over 71% compared to 2022 and over 10 times 2020 subscribed Glo Fiber revenues have grown over 160% per year over the past three years, fueling our industry-leading consolidated revenue and adjusted EBITDA growth rates.
Moving to Slide 6. We added over 86,000 new Glo Fiber passings in 2023, almost a 20% increase from 2022 and over a threefold increase from 2020 levels. Our sales team has more than kept pace with our construction team. We added over 17,000 Glo Fiber net customers, representing a more than 32% increase over 2022 and a 62% annual growth rate since 2020. We expect to accelerate the pace of Glo Fiber construction and sales again in the next year, continuing the annual improvements we've made in each of the past three years.
Before I turn the call over to Jim, I'd like to give an update on our pending acquisition of Horizon telcom, we've received most of the required regulatory approvals and expect to close the transaction in the second quarter, depending on the timing of the remaining regulatory approval the SingTel and Aurizon teams have been working well together and planning for the integration of the two companies. We now expect most of the system integration work to be completed in the first quarter of 2025.
With that, I'll now turn the call over to Jim to review the details of our financial results.
Jim Volk
Thank you, Chris, and good morning, everyone. I'll start with our broad broadband financial results for 2023 on slide 8, broadband revenue grew $20.3 million or 8.1% to $269.3 million. As Chris just mentioned, Glo Fiber revenue was the primary catalysts from $16.8 million or 92% for the prior year. With strong customer growth of over 71% and a 4% increase in data subscriber RPU. Cable market revenues, excluding the impact of our discontinued theme service, grew $2.5 million or 1.4% due primarily to 1.8% growth in data subscriber. Our commercial fiber revenue grew $3.3 million or 8.5% due primarily to $3 million in nonrecurring early termination fees related to backhaul circuit disconnects. T-mobile disconnected 338 backhaul circuits during 2023. As part of the previously announced shutdown of the former Sprint network with most of the T-Mobile backhaul disconnects now behind us.
We expect commercial fiber revenue in 2024 to decline by $3 million in lower backhaul revenue from a full year of lower T mobile backhaul service, $3 million and lower nonrecurring early termination fees and $1 million in additional T-Mobile churn in 2024, partially offset by continued growth in other customer sites. We expect commercial fiber revenues to return to mid to high single digit growth rates starting at 2025. Broadband adjusted EBITDA grew $15.8 million or 17.6% to $105.8 million in 2023 when compared to 2022 due to the previously mentioned revenue growth of $20.3 million, partially offset by $4.6 million in higher advertising expenses to support the Glo Fiber expansion. Broadband adjusted EBITDA margins expanded 320 basis points year over year to 39.3% as we continue to see the benefits of operating leverage of our fiber network as the broadband cost of service declined slightly year over year, despite adding over 17,000 Glo Fiber customers over the past year.
On Slide 9, power segment revenue declined slightly to $18.6 million due primarily to lower inter-company revenue for the decommissioning of the fixed wireless network in 2022, we have not recognized any tower lease term from T-Mobile. To date, we still expect T-Mobile to terminate 53 leases as part of the previously announced paying lock agreement. So the timing is uncertain. These 53 leases will continue to generate rental revenue until all required equipment is removed from the leased property and an inspection notice position.
Total adjusted EBITDA declined 300,000 to $1.6 million due primarily to the lower inter-company revenue. Moving to Slide 10. Consolidated revenue grew 7.5% to $287.4 million in 2023 due to the previously mentioned growth in broadband, consolidated adjusted EBITDA grew 19.3% to $90.6 million, also due to growth in Broadband adjusted EBITDA margins expanded year over year from 28.4% to 31.5% in 2023 due to the scaling of our fiber network. Please note that we expect our consolidated revenue and adjusted EBITDA growth rates to slow in 2024 due to the previously mentioned $7 million in expected decline in Vault and T-Mobile revenue, we expect consolidated revenue and adjusted EBITDA to return to similar growth rates in 2025. As we've reported over the past three years, we have $239 million of liquidity as of December 31st, as displayed on slide 11, consisting of $139 million in cash and $100 million in available revolving line of credit. We drew down the remainder of our $300 million delayed draw term loans during the fourth quarter prior to the expiration of its availability. This liquidity position does not include the incremental $356 million in committed credit facility and preferred equity financing related to the Horizon transaction, which will close on the same day as the Horizon merger. Negative free cash flow for 2023 was $143 million or $28 million more than prior year, due primarily to increased investments in expanding Glo Fiber and government subsidized construction on certain tenants, partially offset by $26 million in income tax and sales tax refunds in 2023.
Please note, we received $17.3 million in proceeds from the closing of the 2.5 spectrum sale in one and $1.9 million of government grants related to uncertain construction that are reported separately from capital expenditures in the cash flow from investing.
Yes, as reflected on slide 12, our outstanding debt was $300 million as of December 31st. We have no significant debt maturities until 2026.
And now I'll turn the call over to Ed.
Ed McKay
Thank you, Jim, and good morning, everyone. I'll start on Slide 14 with an update on our integrated broadband network. We had a record quarter for fiber construction, adding over 33,000 new fiber passings and constructing almost 500 new route miles of fiber Q4 marked a milestone for Glo Fiber now passes more homes and businesses that are incumbent cable markets. In the fourth quarter, we launched new the new Glo Fiber market of Salisbury Maryland. And we now offer Glo Fiber multi-gigabit service in 22 markets with three additional market launches planned for 2024.
Turning to Slide 15. Our total number of approved Glo Fiber passings has grown to 564,000, primarily driven by a new franchise agreement to expand fiber services to approximately 40,000 additional homes and businesses in Frederick County, Maryland. We now have 74 franchise agreements in 25 markets across five states. We continued to work through challenges with pole attachment permits and underground locates. Our engineering and construction teams delivered a very strong fourth quarter, adding over 31,000 new Glo Fiber passings and over 2000 government subsidized fiber passings, bringing our total fiber passings to over 236,000. A number of planned. Government subsidized passings decreased slightly quarter over quarter as we decreased the scope of one government grant project. However, our government our construction backlog remains very robust with approximately 351,000 incremental fiber passings approved for construction as we ramp up Glo Fiber construction, we continue to see strong customer growth. As shown on slide 16, we added over 4,300 Glo Fiber customers in the fourth quarter to finish the year at over 41,700 and our data penetration rate reached 17.8%, up from 16.5% at the end of 2022. Our total number of data video and voice revenue generating units has reached over 51,000, up approximately 65% year over year. As Jim mentioned, our broadband data average revenue per user increased by 4% year over year to over $76, driven by a combination of additional equipment revenue and customers selecting higher speed tiers. For the quarter, 47% of our new residential subscribers adopted speed tiers of one gig or higher, including approximately 4% that took speeds of two gigabytes. At the end of the fourth quarter, approximately 11% of our total Glo Fiber customers subscribe to video service and approximately 12% subscribe to voice service. And finally, our churn remained very low at 1.0% for 2023, an improvement of seven basis points over the prior year as we continue to focus on providing the fastest speeds in our markets, outstanding local customer service and fairly straightforward pricing.
Moving to slide 17, we highlight our data penetration rates as our markets age. All of our cohorts showed improvements in the fourth quarter, and we continue to see penetration rates above 18% after one year and above 30% after three years. Our oldest cohort launched four years ago has now reached a penetration rate of almost 39%. Ultimately, we expect to reach an average terminal penetration rate of about 30%, five to six years after new passes launch.
Let's move on to our operating results for our cable markets on slide 18, broadband data subscribers remained flat year over year and quarter over quarter, and we ended the year with over 109,000. Our total revenue generating units decreased by about 3% year over year as we continued to see declines in video service and residential voice service do cord-cutting. Our broadband data penetration decreased slightly year over year from 51.7% at the end of 2022 to 50.8% at the end of 2023. Although our broadband data customers was flat year over year, we added approximately 37,000 new passes in 2023, primarily as part of government subsidized projects in unserved areas. Broadband Data churn was 1.58% for the fourth quarter of 2023, an improvement of five basis points year over year as we increased broadband speeds in the second half of the year, giving customer higher speeds and more value for the same place for the entire year. Churn was 1.65%, up about seven basis points year over year due to overbuild or competition in some markets. Rpu increased approximately 1.8% year over year at $82.75.
Turning to slide 19, we highlight our broadband enterprise and wholesale commercial fiber business in 2023, we booked new sales with monthly revenue totaling approximately $350,000, down about 5% year over year. Our new installed monthly revenue for 2023 was $353,000, and we finished the year with an installation backlog of approximately $140,000 in monthly revenue for cell site backhaul connections. T-mobile continues to reduce the number of circuits as part of their Sprint network rationalization project. In Q4 of 2023, they remove 57 connections. As Jim mentioned, we expect additional churn as they complete their network turn down this year and 167 of the remaining 190 backhaul connections are under a long-term contract, excluding T-Mobile churn and revenue compression will remain low at 0.4% for 2023.
Turning to Slide 20. In our tower segment, we ended 2023 with 453 total tower tenants and slightly over two tenants per tower. Our third party tower tenants remained steady, ending the year at 437. However, our inter-company leases increased with new leases for central broadband network equipment at several additional tower sites. As Jim mentioned, we do expect T-Mobile to eventually reduce the number of tower leases as they complete their Sprint network rationalization project.
And finally, our total number of towers decreased to 219 as we decommission two nonrevenue towers and transferred one non-revenue tower to our broadband segment. Our 2023. Capital spending and guidance for 2024 are reflected on Slide 21 with strong Glo Fiber construction results in the fourth quarter, we finished 2023 with capital spending at the higher end of our previous guidance range at approximately $257 million. Significant increase over 2022 was driven by investments in Glo Fiber and government subsidized passes. In 2023, we invested $31 million in government subsidized projects, and we expect to be reimbursed for approximately 50% of these costs as we complete construction, our Glo Fiber investment was $182 million in 2023, including approximately $156 million to design and construct new passings and approximately $17 million to connect new customers. For 2024. We're projecting capital spending in the 260 to 290 million range as we continue to accelerate construction for Glo Fiber and government grant projects, we plan to invest approximately $32 million net of government subsidies to expand broadband to approximately 7,000 unserved homes. We also plan to invest about $190 million in Glo Fiber included approximately $160 million to expand service to 100,000 new passings and $24 million to connect new customers for commercial fiber business. We have budgeted approximately $11 million in success-based spending. We've also budgeted about $41 million in our incumbent cable business, including $10 million of upgrades to improve and to add additional capacity and provide higher speeds in competitive markets.
Thank you very much. And operator, we're now ready for questions.
Question and Answer Session
Operator
Frank Louthan, Raymond James.
Frank Louthan
Great. Thank you. When you see on the horizon deal are completed and you're kind of at a full construction ramp and you have how many homes do you expect to be passing per year? And then what is sort of the catch-up from from the marketing standpoint, how many you think you can you can?
And this first question and second question is T-Mobile and selling fixed wireless in the legacy wireless markets where that you sold to them? Thank you.
Ed McKay
Frank, this is Ed. So I'll answer the T-Mobile question first. Yes, yes, they do offer there their fixed wireless service in the legacy markets that we sold to them up to this point, we've not seen any material impact from a from T-Mobile fixed wireless. As far as the construction rate, as I mentioned, we plan on building 100,000 of additional Glo Fiber passings this year. And we do believe we'll be able to accelerate that somewhat with the addition of Horizon as well. So we expect that yield of pace, you're over 100,000 passings.
Frank Louthan
Okay. All right. Thank you very much.
Operator
Dan Day, B. Riley Securities.
Dan Day
Yes, hey, guys. Thanks for taking the question. And so just, I noticed that you talked about exploring other strategic alternatives in the press release to maybe raise some growth capital. Just maybe frame up what those might look like? And obviously, you talked about a tower sale. If you could provide an update there as you think about strategic alternatives, whether you think about the sale of any nonpower assets? Thanks.
Jim Volk
Yes, Dan, we're looking at multiple options to raise additional growth capital. Yes, towers is one of the possibilities of. We don't have anything to update you today on that. But the important thing to note is we don't really need the capital until 25. So we have plenty plenty of time to explore different alternatives another possibility that we've taken an early look at is maybe entering the asset securitization market, the ABS market for some of our more mature fiber markets. And so we're going to explore all of an option and then come out with what we think is the best option to do. Can you continue to provide capital to grow our business.
Dan Day
Okay, great. Thanks Jim. And then just on the on the CapEx guidance for 2024, and you talked about the increase in the incumbent cable Docsis period. So that's what it sounds like is this new sort of the $40 million-ish maintenance CapEx run rate in our incumbent cable, the the way we should think about it? Or is this sort of a one-time upgrade anomaly sort of go back to a little lower than that.
And then just to be clear on the $180 million to $200 million on guidance for Glo and fiber to the home, are you including any passing from the incremental $100,000 from the Horizon acquisition there? Would that all be CapEx upside to that?
Ed McKay
This is Ed. I'll answer the Horizon question. First, the 100,000 that I mentioned was just a legacy issue. You've said telco fiber business, not any incremental passings from horizon as far as the cable CapEx guidance is roughly $40 million in total CapEx for for 2024. And as I mentioned, about $10 million of that is Docsis upgrades. So I think over the next five years as we do complete our Docsis upgrades, we'll see some elevated CapEx there and then will come down as we complete the Docsis upgrades.
Jim Volk
Yes, I think yes, on the Docsis upgrades. We're planning to spend about $65 million over the next five years from about $10 million of that will be this year. So you can layer that in on top. And once once we complete that project, you should see that cable markets of your CapEx come down again.
Dan Day
And I guess to ask the question on the Glo Fiber one, a little bit different way that you do, you know, execute on some of the passings in the sale, higher markets like would there be would that would that $190 million need to come up to account for that, I guess is the question that was asked.
Jim Volk
Yes, Dan, we will once the deal closes and right now, we're looking at likely second quarter, we will we will provide updated guidance on the capital spending for 20 for yes, it will go up for us as we continue to invest in the Ohio markets, as you mentioned, and also the number of passings on the fiber to the home side, we'll give you some updated guidance on that as well. We do expect to add about 100,000 tons in the Ohio markets over the next three years, how many are going to have come on in 24? We'll provide an update once the deal close often.
Operator
(Operator Instructions) Hamed Khorsand, BWS Financial.
Hamed Khorsand
Hey, good morning. So the first question I had was are you seeing any changes in the competitive landscape regarding Glo Fiber in recent months and quarter as you're talking about this the overbuild.
Ed McKay
So no, no, no significant changes in the competitive landscape. We still primarily compete with one of the big incumbent cable providers there. They've they've continued with promotional pricing, but no significant changes as far as what they are offering from a package standpoint.
Hamed Khorsand
And are you doing anything different on the promotional standpoint as you enter these new markets?
Ed McKay
We're still really leading with a straightforward pricing. We do offer the 1st month of service free, but we're not providing these deep promotional discounts, but our incumbent cable prevent competitor is provided.
Hamed Khorsand
Okay. And then as far as the subscriber signing on initially, are you seeing any changes in the packages that are subscribing to?
Ed McKay
Are they opting initially for the higher tier price or are they coming at lower tier, they're continuing to shift more toward the higher tiers. And as I mentioned, almost half of our new customers are signing up for gigabit speeds or higher. So we're definitely capturing the higher end of the market as customers want more bandwidth.
Hamed Khorsand
And my last question is that has there been a change as far as your view cost been your capital expenditure model and how much has that been?
Ed McKay
So I will say we previously gave a range of $1,400 per up per passing for new new construction for Glo Fiber. We are at the higher end of that range. Now we're in building in some less dense areas and the cost for construction has gone up and we've seen it level off in the past year, but we did see some significantly increases, but significant increases before that.
Hamed Khorsand
Okay, great. Thank you.
Operator
And so that that concludes today's question and answer session. I'd like to turn the call back to Jim Volk for closing remarks.
Jim Volk
Yes. Thank you all for joining us, and we look forward to updating you in 2024 on what we expect will be a very exciting year. Thanks, everyone, and have a great day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
