Earnings Transcript for CNSL - Q2 Fiscal Year 2023

Operator: Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications Second Quarter Earnings Conference Call. Please be advised that today's conference is being recorded [Operator Instructions]. I will now turn the call over to Philip Kranz, Senior Director of Investor Relations. Philip, you may begin your conference.

Philip Kranz: Good morning. And thank you for joining the Consolidated Communications second quarter 2023 earnings call. Our earnings release, financial statements and presentation are posted on the Investor Relations section of our Web site at ir.consolidated.com. Please review the safe harbor provisions on Slide 2 of the presentation. Today's discussion includes forward-looking statements about expected future events and financial results that involve risks and uncertainties that may cause actual results to differ materially from those expressed today. A discussion of factors that may affect future results is contained in Consolidated's filings with the SEC. In addition, during this call, we will refer to certain non-GAAP financial measures, which are defined and reconciled in our earnings presentation and press release. With me today are Bob Udell, President and Chief Executive Officer; and Fred Graffam, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. I will now turn the call over to Bob.

Bob Udell: Thank you, Philip, and good morning, everyone. I'll dive right into some of the key highlights from our second quarter. First, we achieved yet another record quarter in our consumer channel with over 18,600 fiber net adds, demonstrating strong growth of our Fidium Fiber. This represents a 51% sequential increase for fiber net adds. Second, we achieved nearly 7,000 positive total consumer broadband net adds as fiber net adds have offset DSL declines. This increase in consumer broadband net adds is roughly 7 times greater than the prior year and reflects 190% sequential growth from the first quarter. Third, our consumer fiber Internet revenue grew 58%, which contributed to overall consumer broadband revenue growth of over 8%. Fourth, consumer broadband fiber ARPU is up 5.1%. And finally, our fiber churn continues to be low at 1.3%. We continue to see favorable trends for Fidium Fiber with record breaking monthly results. In June, we closed the quarter with 6,600 fiber net adds and in July, we set a new record of nearly 7,300 fiber net adds in the month. This ramp positions us to again exceed our record Q2 fiber net adds results in the third quarter. In addition, we reached an agreement to sell our Washington State assets, resulting from the ongoing review of our market portfolio and supporting our commitment to focused fiber expansion in our core markets. Moving to Slide 4. I'll remind everyone of our journey, including the actions we are taking to solidify our return to growth in 2024. We are executing on a multiyear transformation from a copper-based telecom to a leading fiber broadband provider, and there are plenty of proof points that demonstrate we are well on this path. I am more confident than ever that we'll leverage our operating expense structure as revenue grows and as our cost rationalization actions take hold. We are targeting a mid-teens EBITDA compounded annual growth rate of over the next few years. We also believe that our EBITDA margins have a long term upside to the mid to high 40% level as we drive highly profitable fiber penetration across the consumer, commercial and carrier channels. We've recently initiated a significant business simplification and cost savings initiative to further align and focus our organization as a fiber-first provider, generate efficiencies, drive improved margins and ultimately provide better customer service. This effort includes resource optimization, rationalization of our real estate footprint and a review of our product portfolios. These actions are estimated to result in annualized cost savings of more than $30 million, resulting in improved EBITDA and margins beginning in the second half of 2023. Our fiber investment thesis remains intact. Overall, broadband usage continues to rise and consumers' desire for faster speeds and more reliable connections continues to increase. These industry trends align well with our Fidium Fiber product offering, which we believe is superior to cable and fixed wireless. We currently offer symmetrical 2-gig speeds and our technology is upgradable even beyond our current 10-gig capability. Put simply, fiber's future proof characteristics provide us with undeniable long term growth opportunities, and we certainly are excited with what lies ahead. As we've discussed in the past, we benefit from several distinct structural advantages, including our incumbent position. We have a fiber rich carrier class network that we can cost effectively extend, including existing conduit capacity for buried facilities and pull access where we have aerial plant. These network advantages provide us with favorable unit costs, including an industry leading cost of pass, offering a strong return on investment opportunities. Now I'll update you on our fiber build. In the second quarter, we built fiber to over 57,000 locations and remain on track to upgrade roughly 225,000 locations during 2023. We are approaching our build with a prudent measured pace. For context, in 2021 and '22, we demonstrated that we can build efficiently and with speed. This allowed us to expeditiously reach 40% fiber coverage, an important inflection point that supports consistent consumer broadband net adds and revenue growth. As evidenced by our results, this is exactly what we are doing. Our build strategy in pace is fueled by fiber penetration and government broadband partnerships, all viewed through the lens of prudent liquidity management. First and foremost, we're focused on driving penetration across our existing base of over 1.1 million fiber passings, which provides support to fund additional fiber builds. With the leadership team previously announced and a refined go-to-market strategy, we've never been better positioned to drive increased penetration. Second is the continued pursuit of grant or infrastructure funding opportunities that align with our plan and can be synchronized with fiber build activity in our communities. These government funding opportunities help to offset rural high cost passings, allowing us to maximize the economies of our builds for complete communities. At this time, we are tracking approximately $110 million of additional broadband government partnership opportunities. This does not include any potential opportunities that come as a part of the $42 billion BEAD program, which is still too early to project. However, we are working with the state broadband offices on their respective plans and believe that the BEAD partnership opportunities across our footprint are quite significant. As a reminder, we've been awarded roughly $160 million of broadband partnership and grant funding since 2019 across our markets. The positive reputation that we've earned from our previous success with public private partnership and grant awards positions us well to pursue additional funding. Given the uncertainty with the timing of awards under the BEAD process and the cost efficiencies which come with building complete markets, we are currently evaluating the pace over the next few years and are no longer projecting to be complete in 2026. We will continue to be diligent and nimble in our order to pursue government partnership opportunities with a focus of balancing the number of passings and cost efficiencies of our build. Let's move to Slide 9. During our previous call, we outlined a comprehensive strategy to increase our fiber penetration. We executed well on this strategy as evidenced by our record fiber net add activity in the quarter. Our upward trajectory is fueled by the enhancements we've made to our go-to-market strategy and our re-rally efforts with Fidium Fiber, highlighting its superior value proposition. Additionally, we've continued to add consumer sales partners and door-to-door reps, which are now up 6 times since year end. We continue to see more upside with sales channels optimization as we scale our door-to-door and agent resources. Additionally, we've increased our weekend install capacity and call center sales ability to meet demand and better serve our customers. With these changes, we are well positioned to continue to grow our Fidium Fiber services. Turning to our fiber cohort penetration. We are seeing particularly strong performance across our newer cohorts in 2023. Our Q1 '23 cohort had a penetration of 12.2% in its first full quarter and our Q2 2023 cohort, we have already achieved a penetration of nearly 9%. Our new rally plan went by the team now in place is working. Our cumulative Q2 '21 cohort is at 21.5% at the two year mark, while our Q2 '22 cohort at the one year mark is at 13.4%. Although these older cohorts are slightly below our targets, our re-rally efforts are yielding positive results. For example, where we've conducted re-rally activities, we've generated double digit sequential increases in fiber net adds. In the second half of the year, we will strategically accelerate our re-rally efforts across additional older cohorts. Turning to our commercial and carrier channels. With nearly 59,000 fiber route miles and over 14,700 on-net buildings, we believe we are the leading fiber based provider in the markets we serve. Our deep breadth of services, including fiber broadband connectivity and cloud based services, allows us to deliver differentiated solutions to a wide range of customers. During the first half of the year, we've been executing on our strategy to simplify product offerings, enhance our go-to-market coverage and improve our speed to market to capture more businesses, both on-net and near-net. I am pleased with our progress. Within commercial data services, we're focused on driving growth for our core fiber product offerings of dedicated Internet access and Ethernet connectivity. With success in the fiber connectivity business, we expect to expand and grow our cloud voice security and SD-WAN offerings in our enterprise markets. We are also ramping sales of our fiber Internet connectivity products, leveraging our symmetrical fiber network for small and medium businesses. These products include Fidium@Work, which we introduced last quarter for small businesses and FiberConnect, which serves larger SMBs. Within SMB, installs of our fiber Internet connectivity products were up nearly 2 times year-over-year. We continue to make investments to increase our core network capacity, which benefits all three customer revenue channels. We will continue to leverage new fiber passings within our consumer routes, which provide us with opportunities to use the same fiber to grow both carrier and commercial data and transport services. And we are focused on enhancing the visibility of our network in commonly used industry tools and databases, which allow nationwide carriers, channel partners and customers to more easily identify the robust services consolidated and provide as well as the span of our lit buildings and fiber footprint. We increased our on-net buildings by 4% in the second quarter after normalizing for Kansas, which correlates to higher margins, increased opportunity to upsell, a greater ability to ensure the best customer experience and more opportunities for additional connections. In summary, I am pleased with our continued momentum during the quarter. Our team is working with an unrelenting focus on driving fiber growth across the business, while simultaneously taking aggressive actions to improve our margins. Now I'd like to address the industry wide matter regarding lead-sheathed cable. First of all, we take the health and safety of our workers, the communities in which we live and operate very seriously. Based on the most current information we have, we estimate less than 1% of the company's 100,000 mile copper network contains cable with lead teething. In fact, we have not installed lead-sheathed cables for more than 50 years. We operate in rural and smaller communities where infrastructure deployment historically happened at later dates. Thus, many of our areas never had lead cable utilized. We have a history of and will continue following all applicable local state and federal environmental laws and safety regulations. We will continue to follow the science and work collaboratively with regulators, the industry and our trade association to engage in constructive conversations on this topic. I will now turn the call over to Fred who will provide more insights on our second quarter financial results. Fred?

Fred Graffam: Thanks, Bob, and good morning. I am pleased with the continued momentum we are seeing in the consumer fiber business. As Bob mentioned, we have taken aggressive steps to simplify our business, achieve efficiencies and lower our cost structure, which will support higher margins in the future. Further, our agreement to sell our Washington State assets for gross proceeds of $73 million reflects the company's continued focus on its fiber expansion plans in its core regions. For further context, the Washington assets include consolidated incumbent networks in Ellensburg and Yelm and have revenue of approximately $21 million in 2022. We expect the transaction to close in the second half of 2024 and intend to use the proceeds to bolster our liquidity and fund additional fiber expansion. Now I'll move to our operating results. Total operating revenue for the second quarter was $275.2 million and adjusted EBITDA was $76.9 million. Revenue in Q2 declined $8.5 million or 3% versus the prior year as normalized for last year's Kansas divestiture. Approximately 75% of the decline, or $6.4 million, was driven by lower overall voice revenue across the business. The remaining decline was driven by lower video, network access and other products and services revenue, which was down mainly due to reduced recognition of public private partnership construction projects a year ago. We continue to see strong growth in the consumer broadband business driven by our Fidium Fiber product, which offset some of the declines previously mentioned. Continued progress in our consumer fiber business is a key driver to achieve overall revenue growth in 2024. As discussed on prior calls, we expect a decline in full year 2023 EBITDA principally due to sales of certain nonstrategic assets and lower legacy revenue. The decline in reported adjusted EBITDA of $31 million for the quarter included

Bob Udell: Thank you, Fred. I'll briefly comment on the Take Private proposal from Searchlight Capital and British Columbia Investment Management that we received on April 13th. A special committee consisting of independent directors of the Board is discussing the proposal with the bidders. We are unable to comment any further at this time as the process is ongoing and there can be no guarantee as to the outcome of such discussions. Finally, I'd like to reiterate our transformation to a fiber-first broadband company is as strong as ever, and I'm pleased with the significant progress being made on many fronts. In addition to driving fiber sales across all three of our revenue channels, we're taking meaningful actions to focus the company on our core markets, simplify the business and remove costs. Accordingly, we'll continue to execute against our strategic priorities for the year, including increasing fiber penetration across our three customer groups, delivering an improved customer experience as demonstrated by higher NPS scores and driving operational efficiencies. With consumer broadband fiber net adds at nearly 7,300 in July, we're looking to continue our momentum in the third quarter. Operator, we will now take questions at this time.

Operator: [Operator Instructions] Your first question comes from the line of Michael Rollins of Citi.

Michael Rollins: Just a few follow-ups, if I could. First, I appreciate that you mentioned you're not able to discuss the process of the review that you're doing with the letter that you received from Searchlight. But can you just provide maybe an update on just timing or background about how that type of review may or may not be affecting other decisions that the company may need to make, whether it's from an operating perspective or a strategic perspective?

Bob Udell: I appreciate the curiosity, but I really can't. It's a matter that the special committee and Searchlight to deal with. I'm fortunate that I'm recused from that because I'm focused on the long term sustainability of the business. And so with having achieved over 43% addressable fiber base, we've got a really great platform to sell into. And so I'm focused on operating within the things I can control and have access to.

Michael Rollins: And maybe just following up on that. As you look at the program that you're going to employ in the back half of the year to improved cost, can you talk about what you're doing with some of those initiatives? And as you look to grow revenue from these fiber investments over the next number of years, how should investors think about the operating leverage associated with that revenue growth in terms of how much of that revenue can fall to the EBITDA line?

Bob Udell: Go ahead, Fred.

Fred Graffam: So first, talking about a little more context on the costs that we referred to, that we're taking out of the business. Keep in mind that we divested of some noncore assets over the last few years. So this is -- a big part of this was just rightsizing the cost base for some of those divestitures in prior years. So we were -- in some cases, we had transition services agreements that we had to support the businesses. We're largely beyond those things at this point. So from the perspective of the cost takeouts, it was just time. With respect to the ongoing leverage of the business, I will say that fiber is a very high margin product on an incremental basis. So as we think about driving revenue, fiber revenue in the future, a very large portion of that will drop to the bottom line and drive improved EBITDA margins.

Operator: [Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Mr. Bob Udell.

Bob Udell: Thank you, Sarah. And I appreciate the opportunity to report out to you. It's a very exciting time for our business. With the consumer revenue now positive, an inflection point that we expected at this time of the year on our way -- in this year on our way headed to a full revenue positive in 2024, these inflection points are consistent with our plan and have us very excited as we move into the second half of 2023. So thank you all for tuning in today, and I look forward to updating you on our next call. Have a great day.

Operator: This concludes today's conference call. Thank you for joining. You may now disconnect your lines.