Earnings Call Transcript - ATNI Q3 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the ATN International third quarter 2022 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 would now like to hand the conference over to your speaker today, Mr. Justin Benincasa, Chief Financial Officer of the Company. Please go ahead, sir.

Justin Benincasa, CFO

Great. Thank you, operator, and good morning, everyone. Today, we'll be reviewing our third quarter 2022 earnings results. With me here is Michael Prior, ATN's Chief Executive Officer. Michael will be providing an update on our business and strategy, as well as a high-level overview of our quarterly results. I will cover the relevant financial information and provide additional color where necessary. As a reminder, we released our third quarter earnings press release last night after market close. Investors can find the release and summary slides for the call 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. 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, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And I’ll now turn the call over to Michael for his prepared remarks.

Michael Prior, CEO

All right. Thank you, Justin, and welcome, everyone. The third quarter of 2022 was another good quarter for ATN, one where we served our customers well, advanced our strategic broadband buildout, and made excellent progress toward our three-year growth objectives. For example, we grew the homes passed by our broadband networks to about 614,000 at the end of the quarter, which was 9% higher than a year ago. Of this amount, we added about 29,000 new homes passed by fiber or other higher-speed solutions. Our ongoing network investments are also reflected in our subscriber levels. As of September 30, 2022, 54% of our 205,000 broadband subscribers were connected to our higher-speed networks. That represents an increase of nearly 13% year-over-year. Other metrics we track as part of our three-year plan are also showing good progress. For example, we ended the quarter with 356,000 mobile subscribers in our international segment, up about 9.5% from a year ago, as a result of our sales and marketing efforts and investments. Both in the Caribbean and in the US, most of our expansion work is in markets that we believe will continue to benefit from growing demand and positive secular tailwinds, putting us in an excellent position to benefit from this growth and to help enable it, as we provide these communities with the connectivity capabilities that will help them thrive. Towards that end, our efforts in the US to reach many traditionally underserved communities were bolstered by some great wins in securing critical federal funding. Since July, we've been named recipients or subrecipients for roughly $144 million in awarded grants. As part of our Alaska fiber optic project, we were jointly awarded two grants, each with an Alaska native corporation, for a total of about $103 million. Working with our partners, we plan to utilize this funding to connect households, healthcare facilities, and schools in 25 communities across Alaska's rural Yukon Delta region to affordable high-speed internet for the first time. Beyond the clear economic benefits to our business, these collaborations also have the potential to deliver transformative change for better living conditions and outcomes in these previously unconnected communities. In the lower 48, we have been awarded $41 million in federal funding since July of this year, inclusive of the grant we announced last quarter for $10 million to connect homes and communities in the southwestern US. This will be spent to connect thousands of homes and many schools, businesses, and healthcare facilities to advance high-speed services. And we anticipate applying for and winning additional grants and other funding support in the coming quarters. We view this as a nice complement to our core efforts to execute our US strategy. Now, before turning to our quarterly results, I would like to first take a moment to discuss the current economic and financial climate. While we are closely monitoring developments, we remain confident in our market-leading positions, as well as our overall business prospects. As we aim to become a leading connectivity provider to smaller markets and traditionally underserved segments, we have acquired highly valuable experience investing in, as well as building and operating, network-based businesses. We've managed our operations through multiple business cycles and events that have had significant economic impacts on the markets we serve. So, while we take the recent economic developments and prospects seriously, and we'll adjust as we need to, it's worth noting why we believe we are well positioned to continue moving forward and generating value for our stakeholders. First is our differentiated model and strategy. We provide essential communication services to rural and remote markets that most other operators have historically avoided serving. By building out the necessary capabilities to support this market entry strategy, we have secured high recurring revenues, durable cash flows, sticky customer relationships, a strong competitive footing, and other favorable business attributes. We believe demand for our services will remain high across all our markets. Second is our sound financial and capital allocation strategy. While we invest in those areas that we believe are attractive from a risk-adjusted perspective, we also maintain a strong balance sheet, underpinned by high recurring operating cash flows and limited non-discretionary capital expenditures. This provides us with significant flexibility in our capital spending and allocation decisions based on market conditions and opportunities that arise. We can speed up, slow down, or change the network buildouts in our three-year plan. Similarly, we have the ability to be opportunistic in accessing capital and capitalizing on new growth opportunities or, alternatively, to add shareholder value in other ways. While this flexibility is compelling, we believe it is of particular relevance today given the current business climate. Third, and not least, is our high-quality leadership team. Both at the parent and subsidiary levels, we have a leadership team with operational experience across multiple market cycles, alongside the added benefit of seasoned managers and staff working with them. We are proud of the culture we've built here at ATN over the past 30 plus years and consider it to be a critical strategic asset. So, now for a brief overview of our quarterly results, before Justin provides a deeper dive into our financial performance. In the third quarter, we grew total revenues by 9% and adjusted EBITDA by 14% year-over-year. This was driven by positive results across both of our operating segments, including a strong performance in Alaska, fiber and broadband customer addition, and mobile subscriber growth. We continue to leverage cash flow durability from our more mature businesses and to reinvest those proceeds in markets that are earlier in their growth cycles, as well as in existing network infrastructure upgrades. The healthy growth in our international mobile subscribers and revenue is a nice success story, and we expect to see that positive momentum carry forward as our improved sales and marketing capabilities and completed network upgrades bear fruit. We are steadily expanding our broadband subscriber base and state-of-the-art communications infrastructure, both domestically and internationally. In the US, our multi-year network expansion strategy is benefiting from new sources of federal funding, which have both economic value and social benefits for all involved stakeholders. We're proud to be working with our partners both in Alaska and the southwestern US to help bridge the digital divide. Of note, our Alaskan operations performed well in the quarter, with a substantial topline contribution and strong operating cash flows. While we continue to see resilient demand in Alaska for our enterprise and wholesale solutions, we've also made initial inroads to provide fiber premise services to select markets in the State. This initiative is still in its early stages and we look forward to updating everyone on its progress in future quarters. So, in summary, we delivered good results in both the US and international markets during the third quarter. We remain committed to being first-to-fiber in those markets that align with our established criteria and where we believe we can develop strong first-mover advantages. In addition, we continue to prioritize building and owning modern core digital communications infrastructure, consistent with our Glass and Steel strategy. Most importantly, as we execute towards these two strategic objectives underpinning our three-year plan, we are also steadily expanding our overall broadband network and subscriber count. While that gives us confidence in our long-term growth targets as well as our core financial objectives for the full fiscal year, our financial position allows us to be flexible in the execution of our strategies as we look to maximize value for shareholders. And that's it for now. I'll hand it over to you, Justin, for financial results.

Justin Benincasa, CFO

Great. Thanks, Michael. We delivered solid financial performance in the third quarter of 2022. During the period, total consolidated revenues were $182.2 million, up 9% year-over-year. Operating income was $1.4 million, improving from an operating loss of $1 million last year, and adjusted EBITDA was $41.9 million, up 13.8% year-over-year. These improvements were mainly driven by the addition of a full quarter of Alaska Communications results, compared to a partial quarter last year, and the improved operational performance in Alaska on a pro forma full-quarter basis. Notably, we also continued to see strong subscriber growth in other markets as we make significant network and operational investments, and continue to execute on our three-year strategic growth plan. Now turning to our segment breakdown, in the international segment, revenues were $90 million in the quarter, increasing 6% year-over-year. This growth was the product of higher mobile and broadband subscribers and the associated revenue, partially offset by a scheduled stepdown in federal high-cost support subsidies for the US Virgin Islands. Operating income was $13.4 million, and Adjusted EBITDA for the segment was $27.9 million in the quarter, up 3.77% year-over-year, driven by subscriber growth, as well as operational investments in customer acquisition, additional back-haul capacity, and increased resiliency to support our higher mobile and broadband revenue in the segment. In our US segment, revenues were $92.2 million in the quarter, up 13% year-over-year. During the period, business and carrier services accounted for approximately 70% of the segment services revenue. In line with our consolidated performance drivers, the increase in segment revenues was mainly due to the addition of a full quarter of Alaska's results compared to a partial quarter in the same period a year ago, along with solid organic revenue growth year-over-year. Consistent with our expectations, year-over-year revenue growth in the segment was partially offset by a reduction in legacy wholesale wireless revenues. FirstNet construction contributed $3.3 million to the segment revenues in the quarter. We've completed approximately 70% of the site and now expect to complete 75% of the build by the end of 2022 versus our prior forecast of 85%. This is mainly due to the timing of permitting and approvals as mentioned in prior quarters. Adjusted EBITDA for our US segment was $21.9 million in the quarter, up 33.6% year-over-year. This increase was mainly due to the same factors that led to the higher segment revenues in the period. Net loss in the third quarter was $2.8 million, or a loss of $0.25 per share, compared with a net loss of $2.6 million, or a loss of $0.22 per share in the same period a year ago. We reported $38.9 million in CapEx spending for the quarter. That includes $19.3 million in our US segment and $19.4 million in our international segment. Now turning to our balance sheet and cash flows. We ended the quarter with total cash and cash equivalents of $77.8 million. In addition, for the first nine months of the year, net cash provided by operating activities was $79 million, compared with $47.7 million a year ago. Year-to-date, we utilized approximately $36 million of cash to fund various working capital items, including prepaid circuits and inventory, as well as to reduce payable and accrued balances. At the end of the third quarter, our total debt outstanding was $355.6 million. This amount includes $220.6 million on Alaska Communications balance sheet and excludes $43.5 million related to 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 maintained strength in our balance sheet, as well as flexibility in our financial strategy, as Michael spoke to earlier in his remarks. In summary, we delivered solid financial results in the third quarter, and our outlook for the full fiscal year remains unchanged. We're benefiting from our established leadership across our markets, as well as from our ongoing network expansions, network upgrades, and subscriber-based increases. As we consistently invest in line with our three-year strategic growth plan, we're also building out our foundation and setting ATN up well for the long term. We look forward to continuing to deliver value to all stakeholders across our operations and updating everyone on our progress going forward. Thank you, everyone. That concludes my prepared remarks for today. I'll turn the call back to Michael for his closing comments.

Michael Prior, CEO

Thank you, Justin, and thank you, everyone, for joining us. We're excited about the future, given the essential nature of our offerings, the quality and growing reach of our network, the early mover advantages we're enjoying in underserved communities, and lastly, the financial flexibility we have within our control. I’ll turn it back to the operator for questions.

Operator, Operator

The first question comes from Ric Prentiss of Raymond James. Please go ahead.

Ric Prentiss, Analyst

Yes. Hey, everybody. Good morning. A couple of questions. First, obviously, you guys are trying to help out rural remote areas. You've gotten a couple of grants now, federal grants in Alaska. Help us understand. The social benefit is clear. Help us understand the economic value to you all. What do these grants imply? Is it, you spend CapEx, then you get reimbursed CapEx, you get it through service revenues and kind of the timing. Help us understand how we should think about you announcing these grants and how we should be modeling it and thinking of the economic value-add.

Michael Prior, CEO

Yes. Okay. Thank you, Ric. So, the grant - so, first thing, as we've said previously, I want to note, is that the grant size, and I think you're getting this with the questions, does not translate directly and immediately into economic value for ATN. For example, building in remote areas of Alaska to serve small populations might have less of an economic impact on our business or take longer to mature than some of the smaller grants we've won. The way we think about this, and I'll get back to the CapEx in a second, or Justin, will, but we view these grants more as a complimentary effort to our core strategy. We look at being a primary provider of connectivity to multiple customer segments across our geographies. The grants allow us to serve more people, serve more communities to add economic underpinning to our other efforts. So, when we build fiber into a community in the southwest, for example, to serve, let's say the schools or homes under a grant, we are also working that with our broader plans to extend to fiber to towers, to build businesses and to build other communities that may not be grant-supported. It's really just a piece of the pie. There’s no direct CapEx with the grants we've talked about. These are generally fully funded, with the exceptions of a small amount we talked about in July where I think we got $10 million and we had about $1 million match. It may be under the BEAT program going forward that there are going to be a lot of matching plans, and we will look at whether our piece of CapEx has an adequate risk-adjusted return when we apply for it. When will that impact us? You won't see much impact in our core numbers and deliverables next year. It'll be minimal. As you go farther out, ‘24, ’25, some of these grants will have a nice bolstering, we believe, to EBITDA and revenue, but they’re still just a piece of the pie. This is not a grant-only strategy we have. Does that answer your question, Ric?

Ric Prentiss, Analyst

Yes, it does. The second question, you guys had mentioned the Sacred Wind acquisition. Any update on that acquisition? I think you'd mentioned kind of a rough EBITDA number. Any thoughts on the timing? Any update to the revenue and EBITDA impact? And we noticed that in the third quarter there was, I think, a $3.4 million transaction integration charge. What was that related to?

Michael Prior, CEO

Okay. So, first, I'll take the last one. The transaction charges in the third quarter, that's just M&A-related charges. Some of it was Sacred Wind. Some of it were other activities. As you know from the past, we don't comment on those activities unless and until there's something to announce. As to Sacred Wind’s economic impact, I think we did not - as we said last quarter, we expect the business will generate EBITDA of about $10 million in 2022. We didn't disclose the revenues for that. So, we expect the business to bid at that level or better in the next year, and it will be combined with our Commnet broadband operation and within our overall US segment.

Ric Prentiss, Analyst

And the timing of the closing, did it close?

Michael Prior, CEO

It is not closed, but we expect it to close in the fourth quarter. So, this quarter.

Ric Prentiss, Analyst

And lastly - yes. And the final for me is, obviously, a couple of times, you've highlighted your balance sheet, the financial flexibility. Help us understand, is that to kind of comfort the market that other companies are seeing trouble raising money in a high-interest rate environment to deploy capital programs? Is that also meant to say you're looking at some potential M&A?

Michael Prior, CEO

Well, it's meant to say multiple things. The question is, why do I keep talking about financial flexibility? First is to assure shareholders that we know the whole reason for being here is to reward our investors. That's our primary objective. In the economic environment we're in and the prospective environment, I think there are more questions from shareholders about, okay, what's your spending? Is that level of spending appropriate? How do we ensure that we see adequate returns as investors? What we're saying is, we have the flexibility in our capital allocation to do things for shareholders. We will weigh that against the other point you raised, which is that a lot of our competitors don't have the same flexibility. We see an opportunity to seize first-mover advantage, generate nice returns, perhaps including M&A, and potentially bolt-on M&A that can accelerate or enhance our existing strategy. But we will be very conscious of the environment. We're not going to get too far ahead and we'll adjust as needed to ensure shareholders benefit.

Greg Burns, Analyst

Morning. In the international segment, what was the - how much FCC support revenue were you still getting, and what's the timing of the wind down of the remainder of that?

Justin Benincasa, CFO

We're still getting about $1.4 million a quarter right now - a month, I should say, a quarter, sorry, a quarter. It's $5 million a year. And the wind down, I don't know, Michael, do you want to talk on the schedule of the wind down?

Michael Prior, CEO

Yes. I mean, we're still talking to the FCC about that, and trying to understand it with respect to how that market is served and whether it will be adequately served. So, that's about all I would have to say on that.

Greg Burns, Analyst

Okay. And then on the mobile side, excuse me, churn is still going up, but you're spending more to acquire the customers. So, but they're staying around for a shorter period of time. Can you just talk about maybe that dynamic and the return you're expecting to get there? Or do you have plans to try and bring churn down?

Michael Prior, CEO

Yes, Greg. So, churn on mobile, the first thing I'd note, it is up a little, but recognize that we have a very high prepaid base. The percentage of our base that is prepaid is quite significant. So, I don't think those churn levels, the blended churn number, are bad. That said, of course, lower churn is always better. There is probably some of the slight uptick due to promotional activity. If you grow gross adds, some will stick, some won’t, particularly on a prepaid basis, when promotions roll off. But net-net, we like the economics around it and will continue to watch carefully, but we like the economics around it.

Greg Burns, Analyst

Okay, great. And then lastly, are you still funding your private networks business? What is the status of that?

Michael Prior, CEO

It's really a much smaller business. It's subsumed within our US segment, within Commnet, and it had de minimis funding requirements in this last quarter and probably positive contributions going forward, but small.

Greg Burns, Analyst

In terms of your kind of refocus strategy around first-to-fiber and Glass and Steel, does that still fit in with the strategy, or is that something that maybe is no longer a focus of the business?

Michael Prior, CEO

Yes. So, I think, just maybe for everybody listening, because some people might not know what we mean by private networks, it's essentially campus or in-building or customer-premise advanced wireless connectivity, just to keep it simple. We still offer that service in multiple markets, but we really view it as a service add-on to our existing business. It's not a core part of our strategy to expand that service.

Hamed Khorsand, Analyst

Hi. This is Hamed Khorsand. Just want to ask you about the subscriber growth commentary. How sustainable is this growth, and what are you doing in terms of trying to upsell that customer to get into the more fiber and the higher end of the broadband spectrum that you're providing?

Michael Prior, CEO

So, Hamed, just to be clear, and good morning, you’re asking about the broadband subscriber side? Yes. I think it's very sustainable. In fact, with our plan, we expect to continue to grow both the percentage of our customers who are on higher speeds and the overall number. In terms of upselling, we have seen, as many operators have seen, a continued interest in existing customers to upgrade to higher speeds and higher capabilities, or add mesh solutions and things like that. We continue to have success there. In many of our newer fiber builds, we typically see take-up at higher plan levels than we had built into our business plan. As we see this growth, I think you'll see some positive impact on ARPUs from that, from people buying more speed and the overall growth in subscribers. I think we're quite bullish on it.

Hamed Khorsand, Analyst

Okay. And then my other question was, as far as the mobile side is concerned, what is the competitive risk here as you add more and more subscribers, seeing more degradation in pricing?

Michael Prior, CEO

You always worry about that, and you’re always vigilant about competition, and you keep a careful eye on it. It's not really something that's immediately concerning at this point, either on the competitive or pricing side. If anything, we expect to be growing ARPUs over time in mobile. We’re not concerned about that within the prepaid and post-paid segments, but it's something we will always monitor and react to quickly if we see a change.

Hamed Khorsand, Analyst

And did the growth in these two segments, the broadband and mobile, help you at all to get to a free cash flow positive state in ’23, or is that still further out?

Michael Prior, CEO

Yes. The growth in overall revenue flows down and benefits free cash flow. Free cash flow is somewhat discretionary. We have high operating cash flow today and relatively low maintenance CapEx. If we wanted to stop or slow down expanding, our free cash flow would grow. We would start taking that high operating cash flow and have excess. So, I think that's the main feature. I don't know if Justin wants to add anything.

Justin Benincasa, CFO

No, I think you covered it. We have strong free cash flow today, and a lot of our CapEx, as Michael mentioned, is kind of forward-looking. We have the ability to control that as much as we want.

Michael Prior, CEO

And the other point Hamed, on that, is true. If you look at our market, as a core part of our strategy, there is a layering effect in any market as we add subscribers and customers, whether it's mobile or fixed. There is an economy of scale benefit. As we grow those revenues within that market, you see higher margins, contribution margins, and free cash flow expansion.

Ric Prentiss, Analyst

Yes. Hey, I wanted to come in with a follow-up if I could. A lot of discussion on satellites lately. We've had T-Mobile and SpaceX Starlink, and T-Mobile and Globalstar, as far as putting satellite communication capabilities in the iPhone port team. We get the question a lot from investors. First, how do you guys view the potential competitive threat from satellites into your differing markets? And then associated with that, you guys have had a relationship established with OneWeb. Where's that at? If they complete the merger, which we think they will with Eutelsat, what does that bode for you guys?

Michael Prior, CEO

I think we view satellite as largely complementary to our businesses. As I noted before, we're always vigilant, but we think it's largely complementary due to the inherent capacity differences, along with some performance characteristics and costs. We view it mostly as an attractive fill-in. That's where we partner. We’ve partnered to deliver to people in our broader operating area where satellite is a good and more economical solution than something we could provide by building a network ourselves. We’ll continue to look at that and wholesale relationships too, providing back-haul and transport for the satellite companies. There’s clear value in what they bring, and we see it as largely complementary to what we have.

Ric Prentiss, Analyst

And from a standpoint of any competition on the mobile side?

Michael Prior, CEO

Yes. On the mobile side, I think that is largely hyper-competitive markets trying to compete for now. I don't see it as a major factor, certainly for us. I can't speak to those players, but in our markets, I really don't see it as a major factor. Should it become important to our subscribers to provide some capability like that, I think there will be multiple satellite operators to choose from to partner with to provide that solution when it's really ready. I don't think there's much more impact that I can see.

Ric Prentiss, Analyst

Okay. And you touched on a little bit the macroeconomic environment. Help us understand a little bit about how inflation is affecting your companies and operations directly. Are you feeling anything from a recessionary impact potentially out there? And with a high-interest rate environment, any change in thoughts about all those items? Inflation turns to maybe recession and then high-interest rates as far as what this all might mean for your guidance?

Michael Prior, CEO

Yes. Like everyone else, we’re seeing inflationary pressures in certain areas such as labor, materials, equipment. We're also keeping an eye on potential economic churn around the low end of our subscriber base, but we haven't seen anything meaningful there. What we're doing about it at the moment is that it hasn't had a material impact on our business. We're actively monitoring local, national, and global economic factors, and we're working hard to make the business more efficient, reduce costs. We've also raised prices on our services in select markets where it makes sense. We typically do this by delivering additional value such as higher speed in return for a higher monthly service fee. We're continuing to evaluate it, but that's what we're seeing and that’s what we're doing.

Justin Benincasa, CFO

No. I mean, we've given the EBITDA guidance. Right now, we’re pretty confident where we are in terms of our ability to manage our loan facilities and whatnot. So, we feel confident with where we are now.

Ric Prentiss, Analyst

Okay, very good. Thanks.

Operator, Operator

Thank you. There are no further questions at this time. I will now turn the call back to Michael for closing remarks. Go ahead, sir.

Michael Prior, CEO

All right, thank you, Operator. So, ATN continued to execute at a high level this quarter, with steady momentum across our markets. We're serving our customers well, advancing our strategic broadband build-outs, and making excellent progress toward our three-year growth objectives. Additionally, we are proud to be working with our partners in Alaska and the lower 48 to help bridge the digital divide. So, thank you all.

Justin Benincasa, CFO

Take care, everyone.

Operator, Operator

This concludes today's conference. You may disconnect. Have a great day.