This management's discussion and analysis includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions as they relate toShenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regardingShenandoah Telecommunications Company's expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in whichShenandoah Telecommunications Company operates and similar matters, including information concerning our response to COVID-19, are forward-looking statements. We cannot assure you that the Company's expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company's actual results could be materially different from its expectations because of various factors, that may include natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, changes in general economic conditions, increases in costs, changes in regulation and other competitive factors. Updates to the Risk Factors described in "Item 1A-Risk Factors" as provided in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , may be found below in Part II, under the heading "Item 1A-Risk Factors. The following management's discussion and analysis should be read in conjunction with the Company's Annual Report on Form 10-K for its fiscal year endedDecember 31, 2019 , including the unaudited condensed consolidated financial statements and related notes included therein.
Overview
Results of Operations
Three Months Ended
The Company's consolidated results from operations are summarized as follows: Three Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Revenue$ 55,173 100.0$ 51,814 100.0 3,359 6.5 Operating expenses 54,703 99.1 51,133 98.7 3,570 7.0 Operating income 470 0.9 681 1.3 (211) (31.0) Other income, net 1,083 2.0 994 1.9 89 9.0 Income before taxes 1,553 2.8 1,675 3.2 (122) (7.3) Income tax expense 141 0.3 507 1.0 (366) (72.2) Income from continuing operations 1,412 2.6 1,168 2.3 244 20.9 Income from discontinued operations, net of tax 33,509 60.7 13,186 25.4 20,323 154.1 Net Income$ 34,921 63.3$ 14,354 27.7 20,567 143.3 Revenue Revenue in the third quarter of 2020 increased 6.5% to$55.2 million from$51.8 million in the third quarter of 2019, due to growth of$2.0 million and$1.4 million , in theBroadband and Tower segments, respectively. 21 -------------------------------------------------------------------------------- Table of Contents Refer to the discussion of the results of operations for theBroadband and Tower segments, included within this quarterly report, for additional information. Operating expenses Operating expenses increased approximately$3.6 million , or 7.0%, during the three months endedSeptember 30, 2020 compared with the three months endedSeptember 30, 2019 . The increase was primarily due to incremental Broadband operating expenses incurred to support the launch of our new fiber-to-the-home service,Glo Fiber , and new fixed wireless broadband service, Beam. Income tax expense Income tax expense decreased approximately$0.4 million , during the three months endedSeptember 30, 2020 compared with the three months endedSeptember 30, 2019 , due to changes in excess tax benefits from share based compensation and other discrete items. Income from discontinued operations, net of tax As discussed in the notes to our interim financial statements, the results of our Wireless operations are now presented as discontinued operations. Income from discontinued operations, net of tax, increased$20.3 million , or 154.1%. The increase was driven by a$10.4 million decline in depreciation and amortization primarily as a result of ceasing depreciation and amortization of assets held for sale,$5.5 million increase in postpaid wireless service revenue, a$4.5 million increase in travel revenue, and$4.2 million decline due to ceasing amortization on our right of use assets under operating leases.
Nine Months Ended
The Company's consolidated results from operations are summarized as follows: Nine Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Revenue$ 162,643 100.0$ 153,285 100.0 9,358 6.1 Operating expenses 165,404 101.7 153,437 100.1 11,967 7.8 Operating income (loss) (2,761) (1.7) (152) (0.1) (2,609) 1,716.4 Other income, net 3,103 1.9 3,328 2.2 (225) (6.8) Income before taxes 342 0.2 3,176 2.1 (2,834) (89.2) Income tax expense (benefit) (684) (0.4) (108) (0.1) (576) (533.3) Income from continuing operations 1,026 0.6 3,284 2.1 (2,258) (68.8) Income from discontinued operations, net of tax 76,422 47.0 38,130 24.9 38,292 100.4 Net Income$ 77,448 47.6$ 41,414 27.0 36,034 87.0 Revenue Revenue increased$9.4 million or 6.1%, during the nine months endedSeptember 30, 2020 compared with the nine months endedSeptember 30, 2019 , due to growth of$6.5 million and$3.3 million , in theBroadband and Tower segments, respectively.
Refer to the discussion of the results of operations for the
Operating expenses Operating expenses increased approximately$12.0 million , or 7.8%, during the nine months endedSeptember 30, 2020 compared with the nine months endedSeptember 30, 2019 . The increase was primarily due to incremental Broadband operating expenses incurred to support the launch of our new fiber-to-the-home service,Glo Fiber , and fixed wireless broadband solution, Beam. 22 -------------------------------------------------------------------------------- Table of Contents Income tax expense Income tax expense decreased approximately$0.6 million , during the nine months endedSeptember 30, 2020 compared with the nine months endedSeptember 30, 2019 , due to changes in taxable income. Income from discontinued operations, net of tax Income from discontinued operations net of tax increased$38.3 million or 100.4%. The increase was driven by a$22.2 million decrease in depreciation and amortization, a$19.5 million increase in travel revenue, a$7.0 million decline in interest expense from lower borrowing rates,$4.2 million in ceasing amortization of our right of use assets under operating leases partially offset by$13.8 million in higher income tax expense. Certain assets acquired from nTelos in 2016 became fully depreciated during 2020 and depreciation and amortization of the long-lived assets within our disposal group ceased inSeptember 2020 . Resolution of our travel revenue dispute during June of 2020 reset the travel fee at$1.5 million per month through 2021. As a result, we recognized$25.5 million of travel revenue during the nine months endedSeptember 30, 2020 for service that we have provided sinceMay 1, 2019 . Of that amount,$12.0 million related to service provided during 2019.
Broadband
Our Broadband segment provides broadband, video and voice services to residential and commercial customers in portions ofVirginia ,West Virginia ,Maryland , andKentucky , via hybrid fiber coaxial ("HFC") cable under the brand name of Shentel, fiber optics under the brand name ofGlo Fiber and fixed wireless network under the brand name of Beam. The Broadband segment also leases dark fiber and provides Ethernet and Wavelength fiber optic services to enterprise and wholesale customers throughout the entirety of our service area. The Broadband segment also provides voice and digital subscriber line ("DSL") telephone services to customers inVirginia's Shenandoah County as a Rural Local Exchange Carrier ("RLEC"). These integrated networks are connected by an approximately 6,700 fiber route mile network. This fiber optic network also supports our Wireless segment operations, which are currently classified as discontinued operations, and these intercompany transactions are reported at their market value. 23 -------------------------------------------------------------------------------- Table of Contents The following table indicates selected operating statistics of Broadband:September 30, 2020 September 30 ,
2019
Broadband homes passed (1) (2) 230,002 206,262 Incumbent Cable 207,655 206,262 Glo Fiber 22,347 - Broadband customer relationships (3) 106,314 94,356 Residential and SMB RGUs: Broadband 98,764 82,413 Incumbent Cable 95,962 82,413 Glo Fiber 2,802 - Video 53,647 55,015 Voice 33,019 30,956 Total Cable and Glo Fiber RGUs 185,430
168,384
Residential and SMB Penetration (4) Broadband 42.9 % 40.0 % Incumbent Cable 46.2 % 40.0 % Glo Fiber penetration 12.5 % - % Video 23.3 % 26.7 % Voice 15.5 % 16.3 % Residential and SMB ARPU (5) Broadband$ 77.71 $ 77.47 Incumbent Cable$ 77.66 $ 77.47 Glo Fiber$ 80.03 $ - Video$ 93.08 $ 89.32 Voice$ 29.61 $ 30.68 Fiber route miles 6,705 5,864 Total fiber miles (6) 367,154 311,702
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(1)Homes and businesses are considered passed ("homes passed") if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information. Homes passed have access to video, broadband and voice services. (2)Includes approximately 16,600 RLEC homes passed where we are the dual incumbent telephone and cable provider. (3)Customer relationships represent the number of billed customers who receive at least one of our services. (4)Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate. (5)Average Revenue Per Customer calculation = (Residential & SMB Revenue * 1,000) / average customer relationships / 3 months (6)Total fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. 24
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Table of Contents
Three Months Ended
Broadband results from operations are summarized as follows:
Three Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Broadband operating revenue Cable, residential and SMB$ 37,469 73.9$ 33,696 69.2 3,773 11.2 Fiber, enterprise and wholesale 6,589 13.0 7,085 14.6 (496) (7.0) Rural local exchange carrier 4,645 9.2 5,583 11.5 (938) (16.8) Equipment and other 2,007 4.0 2,317 4.8 (310) (13.4) Total broadband revenue 50,710 100.0 48,681 100.0 % 2,029 4.2 Broadband operating expenses Cost of services 21,326 42.1 20,032 41.1 1,294 6.5 Selling, general, and administrative 9,792 19.3 8,790 18.1 1,002 11.4 Depreciation and amortization 10,106 19.9 8,617 17.7 1,489 17.3 Total broadband operating expenses 41,224 81.3 37,439 76.9 3,785 10.1 Broadband operating income$ 9,486 18.7$ 11,242 23.1 (1,756) (15.6)
Cable, residential and small and medium business (SMB) revenue
Cable, residential and SMB revenue increased during the three months ended
Fiber, enterprise and wholesale revenue Fiber, enterprise and wholesale revenue decreased during the three months endedSeptember 30, 2020 approximately$0.5 million , or 7.0%, due primarily to lower amortized revenue partially offset by growth in enterprise and backhaul connections. Rural local exchange carrier (RLEC) revenue RLEC revenue decreased approximately$0.9 million , or 16.8%, compared with the three months endedSeptember 30, 2019 due to lower governmental support and a decline in residential voice and data subscribers. Cost of services Cost of services increased$1.3 million , or 6.5%, primarily driven by higher compensation costs due toGlo Fiber and Beam fixed wireless start-up staffing and maintenance of the expanding network. Selling, general and administrative Selling, general and administrative expense increased$1.0 million or 11.4% compared with the three months endedSeptember 30, 2019 , due to increases in compensation expense of$1.5 million as a result ofGlo Fiber and Beam fixed wireless start-up staffing, offset by a$0.4 million reduction in bad debt expense. Depreciation and amortization Depreciation and amortization increased$1.5 million or 17.3%, compared with the three months endedSeptember 30, 2019 , primarily as a result of our network expansion, the introduction of fiber to the home service under our brand,Glo Fiber , and our fixed wireless broadband solution, Beam. 25
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Table of Contents
Nine Months Ended
Broadband results from operations are summarized as follows:
Nine Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Broadband revenue Cable, residential and SMB$ 108,242 71.9$ 99,703 69.2 8,539 8.6 Fiber, enterprise and wholesale 21,853 14.5 20,373 14.1 1,480 7.3 Rural local exchange carrier 14,607 9.7 17,305 12.0 (2,698) (15.6) Equipment and other 5,928 3.9 6,732 4.7 (804) (11.9) Total broadband revenue 150,630 100.0 144,113 100.0 % 6,517 4.5 Broadband operating expenses Cost of services 61,572 40.9 59,348 41.2 2,224 3.7 Selling, general, and administrative 28,960 19.2 24,316 16.9 4,644 19.1 Depreciation and amortization 30,448 20.2 27,243 18.9 3,205 11.8 Total broadband operating expenses 120,980 80.3 110,907 77.0 10,073 9.1 Broadband operating income$ 29,650 19.7$ 33,206 23.0 (3,556) (10.7)
Cable, residential and small and medium business (SMB) revenue
Cable, residential and SMB revenue increased during the nine months ended
Fiber, enterprise and wholesale revenue Fiber, enterprise and wholesale revenue increased during the nine months endedSeptember 30, 2020 approximately$1.5 million , or 7.3%, due primarily to an increase in new enterprise and backhaul connections. Rural local exchange carrier (RLEC) revenue RLEC revenue decreased approximately$2.7 million , or 15.6%, compared with the nine months endedSeptember 30, 2019 due primarily to a decline in residential voice and data subscribers, lower governmental support, lower switched access revenue from other carriers, and lower intercompany phone service. Cost of services Cost of services increased$2.2 million , or 3.7%, primarily driven by higher compensation expense to support the expansion of our network related to the launch of our new servicesGlo Fiber and Beam. Selling, general and administrative Selling, general and administrative expense increased$4.6 million or 19.1% compared with the nine months endedSeptember 30, 2019 , due to increases in compensation expense of$4.1 million as a result ofGlo Fiber and Beam fixed wireless start-up staffing, higher benefit plan and incentive accruals from strong operating results, and$0.6 million of professional fees. Depreciation and amortization Depreciation and amortization increased$3.2 million or 11.8%, compared with the nine months endedSeptember 30, 2019 , primarily as a result of our network expansion and the introduction of fiber to the home service under our brand,Glo Fiber . Tower Our Tower segment owns 230 cell towers and small cell sites and leases colocation space on the towers to wireless communications providers, including our Wireless segment which is currently classified as a discontinued operation. Substantially all of our owned towers are built on ground that we lease from the respective landlords. The colocation space that we lease to our Wireless segment is priced at our estimate of fair market value. 26
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Table of Contents The following table indicates selected operating statistics of the Tower segment: September 30, September 30, 2020 2019 Macro towers owned 222 221 Small cell sites 8 - Tenants (1) 414 380 Average tenants per tower 1.8 1.7
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(1)Includes 208 and 177 intercompany tenants for our Wireless segment as of
Three Months Ended
Tower results from operations are summarized as follows:
Three Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Tower revenue$ 4,501 100.0$ 3,140 100.0 1,361 43.3 Tower operating expenses 2,080 46.2 1,810 57.6 270 14.9 Tower operating income$ 2,421 53.8$ 1,330 42.4 1,091 82.0 Revenue Revenue increased approximately$1.4 million , or 43.3%, during the three months endedSeptember 30, 2020 compared with the three months endedSeptember 30, 2019 . This increase was due to a 8.9% increase in tenants and a 37.9% increase in average revenue per tenant driven by amendments to intercompany leases effective in the first quarter of 2020. Operating expenses Operating expenses were comparable with the prior year.
Nine Months Ended
Tower results from operations are summarized as follows:
Nine Months Ended September 30, Change ($ in thousands) 2020 % of Revenue 2019 % of Revenue $ % Tower revenue$ 12,490 100.0$ 9,195 100.0 3,295 35.8 Tower operating expenses 6,046 48.4 5,440 59.2 606 11.1 Tower operating income$ 6,444 51.6$ 3,755 40.8 2,689 71.6 Revenue Revenue increased approximately$3.3 million , or 35.8%, during the nine months endedSeptember 30, 2020 compared with the nine months endedSeptember 30, 2019 . This increase was due to a 10.2% increase in tenants and a 26.0% increase in average revenue per tenant driven by amendments to intercompany leases. Operating expenses Operating expenses increased approximately$0.6 million during the nine months endedSeptember 30, 2020 compared to the prior year period due primarily to increases in ground lease rent. 27
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Table of Contents Non-GAAP Financial Measures Adjusted OIBDA Adjusted OIBDA represents Operating income from continuing operations before depreciation, amortization of intangible assets, stock-based compensation and certain other items of revenue, expense, gain or loss not reflective of our operating performance, which may or may not be recurring in nature. Adjusted OIBDA is a non-GAAP financial measure that we use to evaluate our operating performance in comparison to our competitors. Management believes that analysts and investors use Adjusted OIBDA as a supplemental measure of operating performance to facilitate comparisons with other telecommunications companies. This measure isolates and evaluates operating performance by excluding the cost of financing (e.g., interest expense), as well as the non-cash depreciation and amortization of past capital investments, non-cash share-based compensation expense, and certain other items of revenue, expense, gain or loss not reflective of our operating performance, which may or may not be recurring in nature.
Adjusted OIBDA has limitations as an analytical tool and should not be
considered in isolation or as a substitute for operating income, net income or
any other measure of financial performance reported in accordance with
The following tables reconcile Adjusted OIBDA to operating income from continuing operations, which we consider to be the most directly comparable GAAP financial measure: Three Months EndedSeptember 30, 2020 Corporate & (in thousands) Broadband Tower Eliminations Consolidated Operating income from continuing operations$ 9,486 $ 2,421 $ (11,437) $ 470 Depreciation 9,939 467 1,422 11,828 Amortization 167 - - 167 OIBDA 19,592 2,888 (10,015) 12,465 Share-based compensation expense - - 1,137 1,137 Deal advisory fees - - 1,032 1,032 Adjusted OIBDA$ 19,592 $ 2,888 $ (7,846) $ 14,634
Three Months Ended
Corporate & (in thousands) Broadband Tower Eliminations Consolidated Operating income from continuing operations$ 11,242 $ 1,330 $ (11,891) $ 681 Depreciation 8,472 691 1,433 10,596 Amortization 145 - - 145 OIBDA 19,859 2,021 (10,458) 11,422 Share-based compensation expense - - 723 723 Adjusted OIBDA$ 19,859 $ 2,021 $ (9,735) $ 12,145 28
-------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2020 Corporate & (in thousands) Broadband Tower Eliminations Consolidated Operating income from continuing operations$ 29,650 $ 6,444 $ (38,855) $ (2,761) Depreciation 29,960 1,414 4,148 35,522 Amortization 488 - - 488 OIBDA 60,098 7,858 (34,707) 33,249 Share-based compensation expense - - 5,306 5,306 Deal advisory fees - - 3,002 3,002 Adjusted OIBDA$ 60,098 $ 7,858 $ (26,399) $ 41,557
Nine Months Ended
Corporate & (in thousands) Broadband Tower Eliminations Consolidated Operating income from continuing operations$ 33,206 $ 3,755 $ (37,113) $ (152) Depreciation 26,936 2,102 4,462 33,500 Amortization 307 - - 307 OIBDA 60,449 5,857 (32,651) 33,655 Share-based compensation expense - - 2,769 2,769 Adjusted OIBDA$ 60,449 $ 5,857 $ (29,882) $ 36,424
Financial Condition, Liquidity and Capital Resources
Sources and Uses of Cash: Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations, proceeds available under our revolving line of credit, and proceeds from dispositions. As ofSeptember 30, 2020 our cash and cash equivalents totaled$184.1 million and the availability under our revolving line of credit was$75.0 million , for total available liquidity of$259.1 million . •The Company generated approximately$44.8 million of net cash from continuing operations during the nine months endedSeptember 30, 2020 , consistent with the nine months endedSeptember 30, 2019 . •Discontinued operations contributed$182.5 million driven by strong results for our Wireless operations, including a$19.5 million increase due to the resolution of our travel revenue dispute with Sprint. Net cash used in investing activities from continuing operations increased$23.1 million during the nine months endedSeptember 30, 2020 , compared with the nine months endedSeptember 30, 2019 due to the following: •$33.9 million increase in capital expenditures due primarily to higher spending in the Broadband segment primarily driven by ourGlo Fiber market expansion. •$10.0 million decline in acquisitions. In 2019, the Company acquiredBig Sandy Broadband, Inc. for$10.0 million . •Net cash used in investing activities from discontinued operations decreased$40.4 million to$17.8 million during the nine months endedSeptember 30, 2020 , due to completion of the nTelos andParkersburg network expansions in the first half of 2019 and postponement of Richmond Sliver territory expansion projects. Net cash used in financing activities from continuing operations during the nine months endedSeptember 30, 2020 , consistent with the nine months endedSeptember 30, 2019 . Indebtedness: As ofSeptember 30, 2020 , the Company's indebtedness totaled approximately$696.4 million , net of unamortized loan fees of$10.1 million , with an annualized overall weighted average interest rate of approximately 2.3%. Cash proceeds to be received, in connection with the completion of the sale of the Wireless segment operating assets and operations, are required to be used to repay our outstanding indebtedness. Principal payments on our debt are thus presented as cash used to finance our discontinued operations. Refer to Note 9, Debt, for information about the Company's Credit Facility and financial covenants. 29 -------------------------------------------------------------------------------- Table of Contents Borrowing Capacity: As ofSeptember 30, 2020 , the Company's outstanding debt principal, under the Credit Facility, totaled$706.4 million , with an estimated annualized effective interest rate of 2.3% after considering the impact of the interest rate swap contracts and unamortized loan costs.
As of
We expect our cash on hand, available funds under our revolving credit facility, proceeds received from dispositions, and our cash flow from continuing operations will be sufficient to meet our anticipated liquidity needs for business operations for the next twelve months. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our credit facility. Thereafter, capital expenditures will likely be required to continue planned capital upgrades to the broadband networks, tower infrastructure and to provide increased capacity to meet expected growth in demand for our products and services. The actual amount and timing of our future capital requirements may differ materially from our estimate depending on the demand for our products and services, including the outcome of a potential sale of our wireless segment to T-Mobile, new market developments and expansion opportunities. Our proceeds from dispositions and cash flows from continuing operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, demand for our products and services, availability of labor resources and capital, changes in our relationship with Sprint, natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, and other conditions. Our ability to attract and maintain a sufficient customer base, particularly in our Broadband markets, is critical to our ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect our results. Critical Accounting Policies
There have been no material changes to the critical accounting policies as
previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for
the year ended
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