Consolidated Communications : Financial Reporting Document

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CNSL.OQ - Q1 2023 Consolidated Communications Holdings Inc Earnings Call

EVENT DATE/TIME: MAY 02, 2023 / 12:30PM GMT

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MAY 02, 2023 / 12:30PM, CNSL.OQ - Q1 2023 Consolidated Communications Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

C. Robert Udell Consolidated Communications Holdings, Inc. - President, CEO & Director

Fred Albert Graffam Consolidated Communications Holdings, Inc. - Executive VP & CFO

Philip Kranz

C O N F E R E N C E C A L L P A R T I C I P A N T S

Gregory Bradford Williams TD Cowen, Research Division - Director

Michael Ian Rollins Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Consolidated Communications First Quarter Earnings Conference Call. Please be advised that today's conference is being recorded. (Operator Instructions)

Thank you. And 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 First Quarter 2023 Earnings Call. Our earnings release, financial statements and presentation are posted on the Investor Relations section of our website 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 risk 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 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.

Before I turn the call over to Bob, I'll note, on April 13, we announced the receipt of a take private proposal from Searchlight Capital and British Columbia Investment Management. Since the announcement, the Board has established a special committee consisting of independent directors of the Board to review and consider the proposal as well as any other alternative proposals or other strategic alternatives that may be available to the company. Given that the process is ongoing, we will not be able to take any questions related to this matter during our Q&A session.

I will now turn the call over to Bob.

C. Robert Udell - Consolidated Communications Holdings, Inc. - President, CEO & Director

Thank you, Philip, and good morning, everyone. First, let me say there is a lot of enthusiasm and excitement across our organization. A key initiative for us was starting the year with a leadership team realignment. We added key leaders to our consumer business and Commercial and carrier businesses and brought on a new CFO in addition to making other strategic changes. The depth of go-to-market experience with these new leaders is incredible, and I am quite pleased with the immediate contributions of our collective team.

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MAY 02, 2023 / 12:30PM, CNSL.OQ - Q1 2023 Consolidated Communications Holdings Inc Earnings Call

More importantly, we are seeing strong early momentum and are building the foundation for growth in the future. And Q1 highlights include a new quarterly record of consumer fiber broadband net adds of over 12,300 on the growing strength of Fidium Fiber. Second is the positive total consumer broadband net adds of over 2,400. This means that just in the first quarter, we are well above our full year 2022 consumer broadband net adds, offsetting DSL losses. Third, consumer fiber broadband revenue grew 56%, which contributed to consumer broadband revenue growth of over 6%. Consumer broadband fiber ARPU is up 5.7% and fiber churn improved to an industry-leading 1%. We are seeing favorable trends for Fidium Fiber.

Notably, we experienced the highest months of consumer fiber net adds in our history at approximately 5,200 in March and approaching 6,000 in April. These levels are well beyond our historical net adds in an average month and position us for even higher fiber net add activity in our second and third quarters. Lastly, we are well positioned to meet growing demand for installations and to efficiently conduct future fiber builds, given our inventory position.

Let's turn to Slide 4, which highlights our journey from a copper-based telecom to a leading fiber broadband provider. We continue to make great progress on our multiyear plan to bring fiber to more than 70% of our footprint. And through our actions during 2023, we are solidifying the foundation for a return to growth in 2024. Our fiber network is projected to reach roughly half of our addressable locations by the end of this year, and we are targeting a compound annual EBITDA growth rate in the mid-teens for 2024 through 2026. We are also looking for our EBITDA margins to approach mid-to high 40% levels over the long term as we drive highly profitable fiber penetration across our three revenue groups: consumer, commercial and carrier, while leveraging our existing cost structure.

On Slide 5, I'll summarize the key aspects of our fiber investment thesis. We couldn't be more excited with the long-term growth opportunity that fiber provides us. With symmetrical speeds that are upgradable to beyond our current 10 gig capability, it's a superior product to cable and fixed wireless. Fiber's future-proof technology is essential, particularly as data demand continues to grow.

To this end, a recent McKinsey report projects data traffic to expand by 20% annually in the next 5 years, and a further site that fiber is arguably the only fixed broadband technology currently capable of delivering the speed and capacity expected by governments, businesses, and consumers.

We also enjoy several distinct structural advantages, including our incumbent position. We have been serving many of our communities for decades and we know our fiber expansion markets very well. We have a fiber-richcarrier-class network that we can cost effectively extend, including existing conduit capacity for buried facilities and pole access where we have variable plant. These network advantages provide us with favorable unit cost, including an industry-leading cost to pass, offering a strong return on investment opportunities as we execute on our plan.

Looking now at Slide 8. I'll update you on our fiber build. In the first quarter, we upgraded nearly 54,000 locations. With our supply chain and labor in good shape, we are on track to upgrade at least 225,000 fiber locations during 2023. Our total fiber passings now extend to just over 1 million locations or 40% of our overall service area up from 10% in 2020.

Now as we discussed in the last quarter, we've reached an important inflection point with our fiber coverage such that we are able to generate increasingly positive overall consumer net broadband adds. As a result, we are now consistently growing our overall consumer broadband revenue. This is a key catalyst for us as we move closer to overall revenue growth.

Looking out to 2026, we expect that more than 70% of our passings will be fiber by the middle of the year, representing an increase of more than 7x our fiber coverage in 2020. We fuel our builds with increased penetration, public-private partnerships and have continued flexibility with our capital structure and our portfolio of assets.

First and foremost, we're focused on driving penetration across our existing base of over 1 million fiber passings which, of course, will boost our revenue and cash flow, providing support to fund additional fiber builds. Second is the continued pursuit of grant or infrastructure funding opportunities that align with our plan. When synchronized appropriately with our fiber builds, these governmental funding opportunities helped to offset rural high cost passings, allowing us to maximize the economies of our builds for complete areas. This is a key component as we continue our expansion.

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MAY 02, 2023 / 12:30PM, CNSL.OQ - Q1 2023 Consolidated Communications Holdings Inc Earnings Call

Now we've been awarded over $150 million in broadband partnership and grant funding opportunities since 2019 across our markets. We've earned a very positive reputation with our previous public-private partnership wins, which in turn leads to new opportunities in neighboring communities.

At the end of first quarter, we were tracking nearly $140 million of additional broadband government partnership opportunities, which is up by $40 million from the prior quarter. This does not include any potential opportunities as part of the $42 billion bead program. As many of you are aware, bead opportunities are expected to come to market over the next 12 months.

In summary, we are doing well on the continued execution of our fiber build. We will continue to be nimble in order to flex the build as opportunities and plans evolve. Let me now highlight our fiber cohort penetrations, which are improving.

Our Q1 2021 cohort is nearly 30% at the 2-year mark, which is above our target of 24%. We are very pleased with the performance of this cohort, which includes particularly strong results from some areas where we had public-private partnerships.

Moving to our Q1 '22 cohort, penetration is 14.7% at the 1-year mark, which is above our target of 14%. During our Q4 call, we outlined a comprehensive strategy to increase penetration across all of our cohorts, and I am ecstatic with the results that we are seeing from these initiatives.

But quite simply, we're doing exactly what we said we would do. Our record Q1 '23 consumer broadband fiber net adds for March were 5,200, and this momentum continues in April where we are approaching 6,000 fiber net adds. To put this into perspective, our prior monthly record was 4,300.

Key factors for this upward trajectory include our re-rally efforts with Fidium Fiber and its superior value proposition. Also, continued growth in our consumer sales partners and our door-to-door headcount, which are now up 4x since year-end. We continue to see more upside with sales channel optimization, along with improvements being made on our e-commerce and call center tactics. Importantly, our install capabilities are keeping pace with our growing sales activity. And as I mentioned, we have CPE in stock ready to deploy for our current installs. Looking ahead, we'll continue executing on all of these key initiatives to keep momentum going and to further build upon our first quarter 2023 results.

Now let's turn to Slide 11, where I provide additional perspective on the progress we're making in the consumer fiber business, which is contributing to overall consumer broadband revenue growth.

Growing this area of our business is a key factor for us as we lay the foundation for overall revenue growth in 2024. In Q1, we added 12,300 Fidium Fiber subscribers, an increase of 60% versus the prior year. Fiber broadband revenue was $26.1 million, up 56% year-over-year and a 10% increase from the fourth quarter. These positive results in our fiber business contributed to overall consumer broadband revenue growth of 6% in first quarter.

Fiber subscriber trends remain consistent with over 70% choosing our 1 gig or higher service, while the vast majority are new subscribers. Our transformation to fiber from copper continues to grow with fiber now making up 37% of our consumer broadband connections, which is up from 25% just a year ago.

Looking at ARPU, fiber ARPU exceeds copper by over $14 or 27%. This is a meaningful difference and provides us with ample upside to continue driving significant revenue and EBITDA as our mix shifts increasingly to fiber. In the first quarter, consumer fiber broadband ARPU was up 5.7% year-over-year, driven by the increase in speed mix as subscribers are favoring our 1 gig product offering. Additionally, we are also seeing an uptick in interest for our 2 gig product.

Let's turn to our commercial and carrier channels. With nearly 58,000 fiber route miles and over 14,500 on-net buildings, we believe we are the leading fiber-based provider in the markets we serve. We offer fiber broadband connectivity and cloud-based services to deliver differentiated solutions targeting customers ranging from small businesses to large enterprises and carriers.

Our go-to-market strategy includes direct and inside sales as well as the agent or partner channel. Under new leadership, we are focused on simplifying our offerings, enhancing our coverage, and improving our speed-to-market to capture more businesses, both on-net and near-net.

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MAY 02, 2023 / 12:30PM, CNSL.OQ - Q1 2023 Consolidated Communications Holdings Inc Earnings Call

Within Commercial data services, we saw year-over-year growth in dedicated Internet access, SD-WAN and Cloud Voice. We are making investments to increase our core network capacity, which benefits all three customer revenue channels. We have enabled 400 gig in transport services in our core networks and enabled a 100 gig into our metro networks, capable of delivering 10 gig of connectivity to any customer's address served by our fiber network. The bottom line is new fiber passings within our consumer routes provide opportunities for us to leverage the same fiber to grow both carrier and commercial data and transport services.

We increased our on-net buildings by 3.5% in the first quarter after normalizing for Kansas, which correlates the higher margins, increased opportunity to upsell, a greater ability to ensure the best customer experience and more opportunities for additional connections.

I will now turn the call over to Fred who will provide more insights on our first quarter financial results. Fred?

Fred Albert Graffam - Consolidated Communications Holdings, Inc. - Executive VP & CFO

Thanks, Bob, and good morning. I am pleased with the progress we made in the first quarter, and especially with the momentum in our consumer fiber business. Total operating revenue for the first quarter was $276.1 million and adjusted EBITDA was $75.4 million. Revenue in Q1 saw a decline of $11.8 million or 4.1% versus the prior year on a normalized basis for last year's Kansas and Ohio divestitures. Approximately half of the decline, or $6.2 million, was driven by lower overall voice revenues across the business. Other products and services revenue accounted for 38% or $4.5 million of the decline, mainly due to reduced recognition of public private partnership construction projects. The remaining decline reflects lower video and network access revenue.

As Bob mentioned, we continue to see growth in the consumer broadband business through continued strength with our Fidium Fiber product. The momentum in this area is a key driver for overall revenue growth in 2024. As discussed in our fourth quarter call, as is reflected in our guidance, we expected a decline in 2023 EBITDA, principally due to sales of certain nonstrategic assets and pressure in our legacy business.

The decline reported adjusted EBITDA of $31.8 million for the quarter included $12 million for nonstrategic asset divestitures; $11 million related to declines in the areas of voice, video, and access revenue; $6 million of compensation expense related to employee recruitment, increased headcount and commissions due to the ramp of Fidium Fiber sales and installations in the quarter; as well as over time related to maintenance activities due to storms in New England.

Now I'll review revenue by customer channel. All of these revenue comparisons will be against normalized Q1 2022 results. Turning to our consumer channel. Total revenue was $109.8 million, down 2.2% compared to a year ago. Consumer broadband revenue was $68 million, up 6.4% as we continue to see strong fiber revenue growth of 56%. Consumer fiber net adds were up 60% from a year ago as the adoption of Fidium Fiber accelerates. For the quarter, we delivered record broadband fiber net adds of 12,337. With our fiber coverage now at 40% and our strategy demonstrating increased momentum, we are primed to see continued improvement in the second quarter.

Consumer fiber ARPU was $67.51 in the first quarter, up 5.7% year-over-year and 0.6% sequentially, driven by speed mix as customers continue to take higher speeds of our fiber services. The fiber mix of Gig+ is up 14 percentage points on a year-over-year basis.

Consumer voice revenue was $32.3 million, down $4.5 million or 12.2%, primarily due to continued erosion of access lines and associated services and long-distance revenue. Video revenue was $9.6 million, a decline of $2.1 million or 17.7% year-over-year as we continue to deemphasize our linear video. The transition from video is also driving a reduction in video programming costs, thus improving margins and free cash flow.

Commercial revenue was $95.5 million, down $4.3 million or 4.3%. Data services revenue was $53.1 million, down 1% year-over-year. Despite the decline, we are seeing growth for dedicated Internet access, which was up 16%, SD-WAN was up 41% and Cloud Voice was up 3%. Voice services revenue was $32.6 million, down $2.3 million or 6.5% in the recent quarter, primarily due to a decline in access lines as commercial customers are increasingly choosing alternative technologies.

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