Earnings Call Transcript - ATNI Q4 2021

Operator, Operator

Ladies and gentlemen, today's conference is scheduled to begin shortly, please continue to stand by and thank you for your patience. Ladies and gentlemen, thank you for standing by. And welcome to ATN International Q4 2021 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I will now like to turn the conference over to your speaker for today. Justin Benincasa, Chief Financial Officer. You may begin.

Justin Benincasa, CFO

Great, thank you, Operator, and good afternoon, everyone. Today, we'll be reviewing our Fourth Quarter 2021 earnings results. With me here is Michael Prior, ATN's Chief Executive Officer. Michael will provide an update on the business strategy and recently announced 3-year growth plan and outlook. I'll cover relevant financial information and provide additional color where necessary. As a reminder, we released our fourth quarter earnings press release last night after the market closed, and investors can find the release and summary slides on our Investor Relations website. Before I turn the call over to Michael, I'd like to point out that this call, our press release, and slides contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures, and for further information regarding the factors that may affect our future operating results, we refer you to our earnings release on our website at atni.com or to the 8-K filings provided to the SEC. And I will now turn the call over to Michael.

Michael Prior, CEO

Okay. Thank you, Justin. And welcome everyone to our fourth quarter and full-year 2021 Earnings Call. I especially appreciate you joining us in what seems to be a very busy news cycle. As many of you know, ATN is focused on building a strong communications network and subscriber base in traditionally underbuilt or underserved market segments. This delivers higher recurring revenues, durable cash flows, and long-term shareholder value. 2022 actually marks our 35th year as a company, and we took this milestone as an opportunity to reflect on the organization we have become, what our purpose is, and where we aspire to be in the future. It became clear to us during the process that what we actually do is much more than providing digital infrastructure and communication services. We provide access to opportunity in the global marketplace, a marketplace for both ideas and commerce. Where we can go includes greater reach, profitability, and growth, as well as a greater positive impact for the people and communities we serve. In Alaska, for example, we've recently provided high-speed data services to schools and students in some of the region's most remote and rural communities. We did this through a partnership with OneWeb's Low Earth Orbit satellite network. As a result of our efforts, more Alaskan students now have access to the world's top online learning solutions, setting them and their communities up for a more prosperous future. We're not stopping there. In Alaska and in the Lower 48, we are working on numerous proposed projects, many of which are partially funded by government grants to bring fiber into poorly served communities. This includes tribal lands and other rural areas. We're doing the same internationally, rapidly deploying fiber and other high-speed solutions to connect homes, businesses, schools, and towers in places like Guyana and the Cayman Islands. We're confident these are good investments because we've done this before. For example, when we embarked upon our fiber deep project five years ago in Bermuda and Cayman following a strategic transaction, we were able to significantly upgrade and expand our network reach and capabilities. These investments enabled us to deliver a stronger product suite to customers, secured our market leadership by growing subscribers, reduced churn, and ultimately enhanced operating cash flows and generated strong returns. This is what gets us going at ATN and why so many of us love what we do. Whether it'd be in the Caribbean or the United States, we bring the possibilities that come from connection. Those possibilities are things people take for granted in well-connected places: competitive access to learning, to healthcare, to economic opportunity. The more than 2,300 employees in the ATN group of companies are making these opportunities and resources available to a broad economic and demographic stratum. They are doing this in demographically diverse and geographically remote places worldwide. To share our mission with you, it is to digitally empower people and communities so that they can connect with the world and prosper. More powerfully, the impact we can make is bringing social and economic prosperity by providing people and communities with the best digital connectivity the world has to offer. The ripples from our work can have a game-changing impact for generations to come. It takes incredible operational and technical expertise and determination to deliver leading connectivity to these regions. It also requires the ability to cultivate respectful and rewarding relationships with the people who live there. The people of ATN excel in these skills and are uniquely equipped to bring this vision to life. Today, we are in the process of advancing several initiatives to secure our vision and long-term growth. On the domestic side, we're pivoting to a Glass and Steel fiber-first build-and-operate platform strategy, while phasing out our legacy wholesale wireless services. Internationally, we are investing and expanding our market leadership in the Caribbean, as well as in higher growth markets such as Guyana. These actions will provide us with several new growth levers and cash flow generators. Before I expand on these, let's talk a little bit about the fourth quarter. During the quarter, we achieved significant top-line and EBITDA growth. These results were in line with our expectations and driven by, one, the integration of Alaska Communications, and two, incremental growth in our international segment. In both domestic and international, we are investing for the future. In both segments, we see an opportunity to be first to fiber in multiple communities, bringing fiber-fed, high-speed data services to consumers and businesses where connectivity is underserved. We have embarked on a multi-year program to seize this opportunity, as highlighted in our earnings release. Additionally, we achieved double-digit revenue and EBITDA growth. Some other highlights from this quarter included completing the integration of Alaska Communications, bringing digital connectivity to more remote areas, and making important advances in our domestic fiber-first platform strategy. We currently have close to 0.5 million homes passed for our broadband networks, with about an even split between domestic and international. Going forward, we expect our broadband metric of homes passed with higher speed data services to increase steadily as we continue to execute against plan and provide a wider menu of services to our increasingly diversified customer base. Turning to international during the quarter: our international operations remained highly reliable and delivered incremental sales expansion. This is largely due to our success in increasing our mobility subscriber count, as well as a rebound in tourism in the U.S. Virgin Islands. Bermuda and the Cayman Islands have also continued to perform well for us, and we're proud of the teams we have built in these markets. Zooming in on Guyana for a moment, we see great potential in this market to grow high-speed fixed and mobile data services as well as overall revenue. We believe these drivers have set the stage to make Guyana a compelling growth engine for us. We plan to continue investing, cultivating relationships, and building our regional expertise in this market to further compound our first-mover advantages and to bring world-class connectivity to the Guyanese people. Moving back to domestic operations, our strategic acquisition of Alaska Communications led to an increase in our overall domestic fiber network and fueled our business momentum in the quarter. This acquisition has provided us with a stronger foothold in the U.S. and a more even split between domestic and international sales contributions. The acquisition also has accelerated our domestic pivot. We are well on our way of phasing out our legacy wholesale wireless business and transitioning into a Glass and Steel fiber-first platform strategy. This involves the synergistic and rapid expansion of our fiber connections to communications towers, adding to and upgrading our tower portfolio, and working with local communities to connect more businesses, schools, and households to high-speed data networks. This transformative pivot, which we expect to gain significant momentum in 2022 and be substantially completed by the end of 2023, will provide us with improved operating leverage, stronger and more predictable long-term cash flow generation, and better risk management in our domestic segment.

Operator, Operator

Ladies and gentlemen, please standby. Your conference will resume momentarily. Please standby.

Michael Prior, CEO

Yes. I think we're back. Thank you, Operator. Not sure what happened there, everybody. But I believe I know where we left off, so I'm just going to jump right back in. The Alaska acquisition has also greatly expanded our reach. We now have more than 250,000 domestic homes passed by broadband networks, representing about half of our company's total broadband homes passed. We also have approximately 5,900 fiber route miles, 200 fiber-connected towers, and 275 owned tower sites in our domestic segment alone. We expect all of those metrics to grow as we execute on our plan. Beyond these key coverage expansions, we're also investing to increase our base of higher-speed services through fiber and other solutions. This includes fiber and other infrastructure builds for our carrier service customers and is thus in line with our pivot to a more sustainable revenue mix in the U.S. Looking beyond 2021, we have recently set a 3-year growth plan for our business as we often do, but this latest growth plan includes some of our targets that we've shared with investors in this release. For example, we aim to achieve a revenue CAGR, excluding construction revenue of 4% to 6% over the next three years, which should lead to annual revenue between $770 million and $810 million in 2024. We think we can improve our operating margins alongside that revenue growth, resulting in a target adjusted EBITDA CAGR of between 8% to 10% over the same three-year period. Following 2024, we expect capex to return to more normalized levels, around 10% to 15% of revenue, and we expect to accomplish all this without increasing leverage, targeting a net debt ratio of less than 1.5 times by the end of 2024. Given our balance sheet strength, human capital, quality risk management controls, and long-term vision, we believe we have adequate resources to accomplish these goals, inclusive of both organic and inorganic growth opportunities. Now, Justin will cover Q4 and 2021 financial results.

Justin Benincasa, CFO

Great. Thank you, Michael. As Michael provided a high-level view of the company's mission and vision, I'll now share how we look at our financial model and strategy. Over the past three decades, ATN has developed a compelling, focused market strategy to excel in overlooked markets. By entering these markets early in their growth cycles, we build strong footholds, lasting customer relationships, and cutting-edge network infrastructure. Our success has always been driven by our people and operating platform investments. By centralizing and developing a best-practice approach to IT, accounting, customer care, and other productivity and risk-reduction processes, we can support our portfolio companies in ways that others cannot in markets of our target size. This enabled us to win business and set up teams for success. Our operations in international markets provide strong examples of how we execute this playbook, and we remain excited about our progress to date in Alaska. With these operating platform capabilities, we can enter markets that are often overlooked by others and find long-term enduring success. While risk can never be completely eliminated, it can be successfully mitigated, and this approach has served us well throughout our operating history. With that, I will move on to our financials. In the fourth quarter of 2021, total consolidated revenues were $187.6 million, up 52% year-over-year. Our operating loss was $20.3 million, and adjusted EBITDA increased to $42.3 million from $30.5 million a year ago. Alaska, with its expansive fiber network, was the key driver of our top-line growth in domestic sales contributions. The year-over-year increase in operating loss for the company is mainly due to Alaska transaction costs, lower profitability in our legacy domestic business, and the reduction in federal high-cost support subsidies for the U.S. Virgin Islands. Now, turning to our segment breakdown: in international, we increased revenues by 4% year-over-year to $87.5 million. This was driven by higher mobility subscriber counts and ARPU, as well as increased carrier service revenues. By year-end, we had approximately 335,000 mobile subscribers. The rebound of travel and tourism also served as a tailwind in the U.S. Virgin Islands, improving our carrier service revenue. Adjusted EBITDA was $27.9 million in the quarter compared to $29 million a year ago. This decrease was driven by our decision to continue investing in network expansions and upgrades, as well as an enhanced sales and marketing programs to drive revenue growth from these investments, all of which led to a slight uptick in OpEx. The one-time impairment charge of $20.6 million was due to an update in market valuation for the U.S. Virgin Island operations, considering the loss of high-margin federal support payments in past network investments. Overall, our international segment continued to perform well in the quarter, displaying the reliability and consistency we've come to appreciate from these markets. Going forward, we plan to continue leveraging our cash flow durability in more mature markets and reinvesting in other markets with high-growth profiles such as Guyana. In the U.S. segment, our acquisition of Alaska continues to perform well and in line with our expectations. As a result, our top line more than doubled year-over-year to $100.1 million. Beyond the significant revenue contribution, this acquisition also provides us with several new competitive offerings in the U.S., including a large fiber network, a healthier revenue mix, and more business expansion opportunities. In the first quarter, FirstNet construction contributed $7.8 million to segment revenues. This revenue is offset by construction costs, and therefore, has minimal impact on our overall operating income. Nevertheless, we believe this is a win-win deal for both parties, and we expect the long-term service contract to be a net positive contribution for the company once the construction phase is complete. We currently have completed about 60% of the total site builds, slightly behind where we expected to end the year due to supply chain issues. We expect to complete an additional 30% by the end of 2022. Adjusted EBITDA for the quarter was $22.3 million versus $7.8 million a year ago, led by higher segment sales from the successful consolidation of Alaska. Our net loss for the quarter was $24.2 million, or $1.60 per share, compared with $20.5 million, or $1.29 per share, in the same period a year ago. Looking forward, we expect our margin profile to improve over time as we realize the benefits of our long-term investments in the U.S. and abroad. We reported $35.2 million in capex for the quarter, with an $11 million contribution from Alaska. The breakdown of U.S. and international was $17.1 million and $17.5 million respectively. Now, turning to our balance sheet and cash flows, we ended the quarter with total cash and cash equivalents of $79.6 million and total debt outstanding of $331.8 million. This includes the Alaska non-recourse debt but excludes the FirstNet customer receivable financing facility. With a consolidated net debt to EBITDA ratio of under two times, including both non-recourse and parent level debt, we continue to benefit from our balance sheet strength and resulting flexibility. Turning to our 2022 guidance, for the full year, we expect significant revenue and adjusted EBITDA growth compared to 2021. With the addition of Alaska Communications full-year results, we expect adjusted EBITDA to be in the range of $165 million to $170 million for the year. To help everyone better understand our expectations around quarterly progress, we anticipate adjusted EBITDA for the first quarter of 2022 to come in slightly below the $42.3 million number in Q4 of 2021. Additionally, capex for the year should be in the range of $150 million to $160 million net of reimbursed amounts, with the large amount projected to be used for network expansion and upgrades. We expect to substantially advance our fiber-first platform strategy in the U.S., with carrier service revenues increasingly driven by backhaul, tower rental, field maintenance, and technical services. We also anticipate additional contributions from growing enterprise and customer fixed data services revenues in 2022. This transition will help to improve our operating leverage, customer mix, visibility into forward operating results, cash flow generation, and risk management in the U.S. In summary, we see revenue strength across the business and acceleration of adjusted EBITDA this year. Longer term, we plan to exit 2024 with a net debt ratio of less than 1.5 times, and substantially higher levels of revenue and adjusted EBITDA. These projections reflect not only where we are today, but also where we believe we can ultimately get to, based on our established playbook, sustainable approach, and operating expertise. And with that, I'll turn the call back to Michael for his closing comments.

Michael Prior, CEO

Alright. Thanks, Justin. Just to reiterate, we're currently in an exciting build-out phase and positioned well for future growth and profitability, which should improve our ability to deliver shareholder value. There are multiple forms that could take. As mentioned previously, we expect these changes to really start picking up steam in the second half of this year, as our long-term investments and refreshed approach in the U.S. come to fruition. Our work in Alaska is off to a good start from several different angles, and we believe the business and market both show great long-term development potential. On the international side, Guyana is poised to be our next serious growth generator, as highlighted in our newly updated mission and vision. We're proud of the work we're doing to help raise people's living standards, and we look forward to executing this value creation playbook in more markets going forward. Now, Operator, we'll turn it back to you to open up for questions.

Operator, Operator

Thank you. Our first question comes from the line of Ric Prentiss with Raymond James. Your line is open.

Brent, Analyst

Hey, this is Brent on a Ric. Good afternoon.

Michael Prior, CEO

Afternoon, Brent.

Brent, Analyst

A few questions. First, what are you assuming on 2022 capex reimbursement, since you said $150 million is net of reimbursements? Is that all FirstNet, or is there any assumption on broadband stimulus or some other item? And along those lines, you mentioned government grants. What is the timing and sizing of what kind of grants you might be able to get to bring fiber and broadband into rural areas?

Michael Prior, CEO

Justin, you want to answer?

Justin Benincasa, CFO

Yeah, I would say on the reimbursable, it's a relatively small number, and it's mostly around grants we've already received. I will let Michael speak to the opportunities around future grants.

Michael Prior, CEO

Yeah. And Justin, I wasn't sure too, Brent, on that first part. I think you're asking reimbursable amounts, but I think you also understand that the range includes a lot more than just FirstNet, including all of the other fiber builds and other builds we're undertaking. In terms of the opportunity - there are tens of millions of households in the U.S. without high-speed connectivity or inadequate high-speed connectivity, I think, by the government numbers. There's billions of dollars that have been assigned under the infrastructure plan, about $65 billion, and money allocated from previous bills, including the Cares Act. There is a serious government drive to close that gap. If we look at the places we're traditionally operating today, particularly in Alaska and the Western and Southwestern United States, we see a lot of opportunity for us to utilize that public-private partnership to get more communities and people connected. So as Justin said, we're doing that now.

Operator, Operator

Ladies and gentlemen, please standby. Please standby. Your call will resume momentarily. Please standby.

Michael Prior, CEO

Okay. Is Brent still with any questions?

Brent, Analyst

If you can hear me.

Justin Benincasa, CFO

Sorry about that. I'll just state for everybody, we're not providing the telecommunications to our headquarters, unfortunately. So I don't know what's going on or what end, but I apologize to everybody. I may just be repeating myself a little bit, but I'm not sure where we dropped. The second part of your question was whether we see opportunity in the federal and state plans, right? There are tens of millions of households that need to be connected with high-speed connectivity. There is a bipartisan push to do so and billions of dollars allocated to help carriers and communities. We have a great history of using those public-private partnerships to accomplish our mission, and we see plenty of opportunities for us to do that in all our operating areas in the U.S. So both up in Alaska and down in the Southwest and Western United States.

Brent, Analyst

Great, and then appreciate you guys giving guidance. Glad to see that for 2022 as well as the three-year guidance and get some clarity about what you guys are expecting. Can you help us circle a range on the adjusted EBITDA line in '24? In other words, what's the starting point on that? The assumption for the 8% to 10% growth rate, considering '21 has half a year of Alaska in it.

Justin Benincasa, CFO

Yes, that is adjusted for Alaska's full-year contribution.

Brent, Analyst

Okay. So we can just add what Alaska did in '21 to what ATNI standalone did?

Michael Prior, CEO

That's another way to think about it. If you took our annual rate now of adjusted EBITDA, this CAGR assumes it's applied to that where we grow from there.

Justin Benincasa, CFO

The CAGR assumes a full-year contribution from Alaska, so it's not just a partial year when compared to a full year.

Brent, Analyst

Got it. Got it. Okay. And then last question, the corporate costs on the adjusted EBITDA line came in a little higher. Obviously, a full-quarter of Alaska on the books now, is this $8 million a quarter range a good run rate going forward?

Michael Prior, CEO

I would say our fourth quarter was probably a little bit higher than we anticipated. Some of that was due to audit costs around bringing in Alaska that we had to take the whole year in a quarter, but it's quite a little high but probably not a bad indication.

Brent, Analyst

Okay. Got it. Thanks, guys. Stay well.

Michael Prior, CEO

Sure. You too.

Operator, Operator

Thank you. Our next question comes from the line of Greg Burns with Sidoti. Your line is open.

Greg Burns, Analyst

Morning. How does the private networks business fit in with the new fiber-first strategy in the domestic markets?

Michael Prior, CEO

Hey, Greg. It's not directly related. It is related to rolling out additional digital infrastructure and connectivity, but it's really not a focal point of that broader strategy. It's a relatively small piece.

Greg Burns, Analyst

Okay, but you are still continuing to invest in that opportunity?

Michael Prior, CEO

Yes, we are. As we mentioned earlier, we are exploring alternatives for that funding. I would like to point out that it does not significantly affect our income statement or EBITDA this year or in our three-year forecast.

Greg Burns, Analyst

Okay. And in terms of your legacy, the wholesale wireless business, you talked about phasing it out. So how much revenue is still tied to those kinds of legacy wholesale wireless contracts? What's your plans for continuing with those contracts when they come up for renewal? And I guess, what does it mean for the amount of investment you need to put into that business? Are you going to just repurpose that towards fiber?

Michael Prior, CEO

Yes. Greg, I wanted to provide some overall context. One of the reasons we gave guidance for both the year and the full year is that we've realized our messages have been coming across as overly complex. We're working to simplify them for everyone. The transformation we're experiencing involves shifting from a roaming model over our networks to supplying critical components for their own networks in regions where we traditionally operate. This is what we refer to as Glass and Steel. We are making a transition towards backhaul, towers, field services, and technical services. We believe this aligns more closely with what carriers need, and it benefits us by reducing risk and creating a more predictable long-term outlook. We appreciate the opportunity to leverage these investments for further growth.

Greg Burns, Analyst

Okay. So, have the other carriers besides AT&T adopted that model? Have you finalized the contracts, and is that something that needs to take place?

Michael Prior, CEO

Yes. Obviously, we need to transition all our customers there, but I'm not going to talk about the interim steps. But that's the goal. That's where we're expecting to get.

Greg Burns, Analyst

In terms of the capex guidance, are you expecting it to remain at this level for the next three years, or will it decrease as we move toward 2024? How should we approach capex over that time period?

Michael Prior, CEO

I think you should think over the three-year time frame that we're definitely leaning into some of these markets and expanding where we see opportunity right now. As we sit here today, we see opportunity to invest, so we will. How that plays out in any given year could be somewhat lumpy, but I think you would expect them to be on the higher side, and then over the next three years.

Greg Burns, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is open.

Hamed Khorsand, Analyst

I just wanted to start off with why are you required to take that impairment on the U.S. Virgin Islands if you're saying that revenue is starting to increase because travel is going up?

Justin Benincasa, CFO

So the way you do that, Hamed, is you kind of look at the overall market and where you think the valuation is. We carry a significantly higher level of fixed assets in that market after post-hurricane as we built out resiliency and repaired the network. Our carrying costs on the fixed assets are higher than in any other market by far. So when you sit back and do the model, you have to look at it and say, okay, if you have high fixed asset costs, that can lead to an impairment on those items like goodwill, and that's what that was.

Hamed Khorsand, Analyst

And then, I was just going to ask you about fiber building that you're planning this year. What would the timing be as far as the capex is concerned, the spend and the timing as to when you think you could actually generate revenue off the new investments?

Michael Prior, CEO

I think it's an ongoing thing on this. We have fiber builds to towers that are under contracts. In the year, we've built fiber to new communities under that reimbursable program that are turning up this year. In places like Guyana or the Cayman Islands, we've built to households last year and will continue to build this year. The revenue as soon as we have the active network there, we're rapidly adding revenue and signing up customers. For example, we've built fiber into a mining town in the interior of Guyana. We added fiber customers and broadband customers at an incredibly quick rate. As soon as we built to this community, it was rapid. Generally speaking, the places we're building have identified needs, and when we complete the builds, we're adding revenue quickly.

Justin Benincasa, CFO

And I would add to that that some of our fiber build is success-based. In other words, we already have a signed contract on it, so that one is immediate.

Hamed Khorsand, Analyst

And then lastly, an increase in marketing and network resource that increased this past quarter. Is that going to be a continuing process in 2022?

Michael Prior, CEO

I would say probably yes more than no. I think we will continue. We saw success in that, and we're going to keep leaning into it.

Hamed Khorsand, Analyst

Could you just share what success means? What kind of timeframe are you looking at for generating income?

Michael Prior, CEO

I would say, the way I look at that is if you look at the subscriber growth in markets, you can see the impact of that. There's some upfront investment to gain those customers, and to be clear, it's related to both mobile and broadband in those markets.

Hamed Khorsand, Analyst

Right.

Michael Prior, CEO

Okay. Thank you.

Operator, Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Michael for closing remarks.

Michael Prior, CEO

I think I'm just going to hang up before it hangs up on us. Thank you, everybody. I appreciate it.

Justin Benincasa, CFO

Thanks, everyone. Take care.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.