SHENANDOAH TELECOMMUNICATIONS CO/VA/ Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• Glo Fiber Expansion Markets: Rapid growth with 52% revenue increase, excitement about free cash flow generation from mature cohorts approaching 37% penetration.
• Incumbent Broadband: Improved with positive data RGU growth, churn reduction, and favorable customer reaction to enhanced rate plans.
• Commercial: Record sales bookings, with sales being an early indicator of future revenue growth acceleration.

Segment Performance:

• Glo Fiber Expansion Markets: Added 5,400 new subscribers and 16,600 new passings, with revenue increasing by 52% over Q1 2024. Mature cohorts from 2019-2023 had 51,000 customers with 40%+ free cash flow margins.
• Incumbent Broadband: Returned to positive data RGU growth, churn reduced to 1.36%, enhanced rate plans aiding customer reaction.
• Commercial: Record quarter for sales bookings of just under $200,000 in monthly recurring revenues, early indicator of future revenue growth.

Guidance:

• Expect to realize $8.5 million of incremental synergies in 2025.
• Plan to refinance credit facilities, targeting ABS market for fiber business and new credit facility for incumbent broadband.
• Full-year 2025 capital investments expected to be $250-$280 million net of $60-$70 million in government subsidies.
• EBITDA margins expected to grow 300-400 basis points annually as Glo Fiber customer additions drive high incremental margins.

Risks:

• Tariff exposure on electronic equipment (e.g., Wi-Fi routers, cable modems) which could lead to increased monthly equipment rental fees if prices rise due to tariffs.

Q: Talk about the potential for some ABS securities. What rates do you think you can get? And do you think you can get a deal done this year? And then what is sort of the optimal capital structure for you guys using that capital source and other sources? How do you think about that longer-term?

A: Jim Volk says ABS is expected to save about 100 basis points in interest expense, planning to use investment-grade tranches of ABS, expect to access the ABS market in the second half of 2025, and long-term debt will likely end up on the fiber side of the capital structure.

Q: Can you walk us through sort of the tail end plan here of Glo Fiber? Is when will that elevated CapEx investment be substantially done? Is that year-end 2026? And is that the point where we can expect CapEx to really fall off? And then once you’re done with the current expansion there, what is an ongoing level of capital intensity we should expect going forward?

A: Ed McKay says Glo Fiber construction is expected to be substantially complete by the end of 2026, with capital intensity dropping to about 20-25% of revenues starting in 2027, and expecting to be free cash flow positive in 2027.

Q: Why would it still be that high? That seems very elevated to me relative to the industry and kind of historic norms. Is that still sort of running drops to houses and things like that for a couple of years? I mean, if we think about it long-term, you settle in at a decent penetration rate. Why wouldn’t capital intensity be in the mid-teens?

A: Ed McKay responds that installing drops to homes is a big factor, and capital intensity will come down as more drops are installed.

Q: Is this the new normal here for the level of EBITDA we should think about going forward? Or is there anything kind of onetime that held margin or any seasonal costs coming up later this year that might walk that margin back a little bit? How should we think about the ongoing level of EBITDA?

A: Jim Volk says it's the new normal, expects revenue and EBITDA to continue growing, and EBITDA margins to grow 300-400 basis points annually as Glo Fiber customer additions drive high incremental margins.

Q: Talk about the amount of subscriber growth you’re seeing on the Glo Fiber side. Is it becoming difficult in adding that incremental one subscriber each quarter? Or you’re not at that point yet?

A: Ed McKay says they're not at that point yet, with most mature markets launched 4+ years ago seeing 1 percentage point growth in the past quarter.

Q: Are you seeing any competitive pressures in any of these markets yet?

A: Ed McKay says there's a small overlap with Brightspeed (roughly 5% of passings), and other than that, no significant fiber deployments in Glo Fiber markets.

Q: Are you changing your CapEx strategy based upon competition? Or you just don’t think that’s a factor?

A: Ed McKay says when building out into a new area, they consider competition, avoiding neighborhoods where Verizon has already built Fios, targeting passings where they're the only fiber provider.

Q: I’m just trying to understand the refinancing topic. It sounds like you were going through this integration process for the horizon, but now it sounds like you’re going through it on integration standpoint, if that’s even a word process just to get this refinancing done. And is that – I’m just trying to understand the cost basis here. I know you’re trying to save on interest rates, but then isn’t there a cost factor as far as this kind of restructuring is concerned?

A: Jim Volk says it's more internal projects, but expects to save ~$7 million in interest expense annually with the refinancing efforts.