Earnings Call Transcript - ATNI Q4 2020

Operator, Operator

Thank you for joining us for the ATN International Fourth Quarter Earnings and 2020 Conference Call and Webcast. I would now like to turn the call over to Mr. Justin Benincasa, Chief Financial Officer. Please proceed, sir.

Justin Benincasa, Chief Financial Officer

Thank you, Operator. Good morning, everyone, and thank you for joining us on our call to review our fourth quarter and full year 2020 results. With me here is Michael Prior, ATN's Chief Executive Officer. As usual, during the call, I'll cover the relevant financial information and Michael will provide an update on the business and outlook. Before I turn the call over to Michael for his comments, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results and 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, I would refer you to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. And with that, I'll turn the call to you, Michael.

Michael Prior, Chief Executive Officer

Thank you, Justin. Good morning, all. As I typically do at this time of the year, I will go through the key elements of the most recent quarter as well as for the full year. I will also offer more outlook commentary than usual to provide additional insight into our plans, particularly as they relate to business shifts within our U.S. Telecom segment. To summarize, ATN's telecom businesses delivered good results in 2020, demonstrating significant resilience in a year in which worldwide businesses faced unprecedented challenges. Our core communications operations produced strong EBITDA results and steady cash flow from operations. This could not have been accomplished without the hard work and dedication of our employees and the consistent past investments that we have made in our communications infrastructure assets. There are areas that we still need to address, particularly in our U.S. Telecom business where we need to adapt and work to optimize a changing environment and changing customer needs and to pursue new opportunities. And in 2020, we demonstrated the discipline to exit businesses like Indian renewable energy that while likely right directionally as an investment thesis, did not turn out to be well suited for our capabilities. On the other side of the ledger, this was also a year in which we showed our ability to act quickly to take advantage of investment opportunities to increase future value. Such was the case with our creative work to reach a definitive agreement to acquire Alaska Communications. This is the type of business and business environment that we know well, and we believe we are well placed to partner with the existing team and our co-investors to drive greater value. More on those subjects to come and I would also encourage you to take note of the added detail in our earnings release and Justin's commentary, which includes the many investments we have made on core infrastructure and the significant capital deployed through equity buybacks at both the subsidiary and parent levels. Now let me turn to our individual operating segments, starting with International Telecom. In the face of continued difficult pandemic-related economic conditions, the fourth quarter for this segment showed the same consistent, strong, and steady performance that we have seen throughout the year, with good subscriber growth in metrics and very positive EBITDA increases as our teams managed very well despite the downturn in certain revenue categories such as enterprise and wholesale. Fixed data subscribers increased by a little more than 10% year-on-year and churn in that base remained quite low. This is our core service offering in our market, so we were quite happy with this result, which reflects both increased penetration of our higher speed offerings and strong market demand overall. Mobile subscribers increased by roughly 7% year-on-year and this was the second consecutive quarter of good growth. Some of that may represent a partial recovery from the early weeks of the pandemic, but our analysis indicates we are picking up share as well, which is a credit to the hard work and improved go-to-market strategy of our sales and leadership teams. Video subscribers continue to decline, but voice subscribers remain steady, even up slightly. Looking ahead for this segment, we are continuing to invest in advanced services, including higher speed fixed and mobile data and enterprise solutions. We had some challenges with regulatory changes in several markets, including a potential reduction of subsidies in the Virgin Islands and the introduction of new licenses in Guyana. But overall, we expect another year of solid EBITDA production for the segment. In addition, we are hopeful there will be an economic recovery in the tourist dependent Island markets as the year moves along. And we expect Guyana's economy to experience significant growth. In U.S. Telecom, EBITDA here declined in the fourth quarter and we expect that to remain the trend as we look ahead to 2021 performance. We are in the midst of a major transition of this business from one driven by roaming-based wholesale revenue to a revenue mix consisting of backhaul, tower rentals, and other carrier services, alongside what we expect to be a growing contribution from enterprise and retail. Toward that end, in addition to investments in fiber, high capacity wireless solutions, towers, and rural wireless broadband equipment, which Justin will cover all in a bit more detail, we also are committing significant dollars to product development, and expanding our sales and marketing activities in private networks and elsewhere. We've had some wins in private networks in 2020, including contracts to provide the network platform for 2 municipalities. But similar to many early stage businesses, the pandemic took a toll on our business development efforts. Thus, actual revenue build-out and contract activity was relatively low in the fourth quarter and for the year. However, we are allocating significant financial resources to accelerate the pace of that activity in 2021, with a particular focus on certain segments, such as municipal networks, and state and local education. We also are pursuing strategic partnerships to expand our product reach and to combine offerings with other participants in this nascent market. Some of the investments in this segment are relatively low risk, such as building out critical network infrastructure under customer contracts or in areas of unmet demand. Others are higher risk, such as the investments in private network solutions, but the market opportunity is commensurately large. We will continue to closely monitor progress and we'll calibrate our investments to align with market and business prospects. So the net of all of this is that we expect much lower EBITDA for this segment in 2021 compared to 2020 levels. However, as you might gather, we believe that the potential rewards are worth the level of investment and we will provide updates as things develop. And as a last note on this segment, relevant to the segment, is the spending we had on our CBRS licenses across the country. The largest portion of that spending was to provide a resource to pursue rural broadband opportunities, particularly in connection with the recently completed Rural Digital Opportunity Fund auction. We expect to retain roughly $20 million in awarded subsidies and related build obligations from that reverse auction. And while we had hopes of a much higher award, we still believe there may be attractive opportunities to utilize the CBRS spectrum to augment local broadband and private network offerings. Further, there are still some questions about the RDOF process and the follow-on funding, which we are following carefully. Moving to renewable energy, which will be the last time I touch on this. As noted, we closed the sale of 2/3 of our equity in Vibrant Energy. While structured as a sale and we indeed received initial cash proceeds of around $20 million, we view this mainly as bringing in a majority partner for this business. We have had some good sales and development momentum there recently, some of which is in concert with our new partner, which is Blue Leaf, a part of Macquarie's Green Investment Group. So we think the team and the business have good potential from here. We are no longer driving, but we will be along for the ride. Given the distance, business sector, and relative size to the rest of our operations, we think that this is a better position for us. Lastly, I'd like to publicly thank the leadership and team at Vibrant for managing through some tough developments in the Indian renewables market and putting the business in a position to grow. Moving to the Alaska Communications transaction. This was one of our major accomplishments in the fourth quarter. The work leading up to our offer to acquire the Alaska Communications, which was accepted in the final hours of 2020 and officially announced on January 4, ACS is an excellent fit for us and we look forward to entering this market with a provider that has a great reputation as a customer-centric organization serving business and carrier customers as well as residential households. We have identified opportunities for revenue synergies coming from combining our capabilities and infrastructure expansion and bringing next-generation managed services and private networks to market. ACS shareholders are set to vote on the transaction on March 12 and assuming they approve the transaction, the next step will be to gain regulatory approvals. I should note that the waiting period for Hart-Scott-Rodino approval has expired, but there are additional federal and local approvals. In addition to the operating and financial benefits of this combination, there are 2 key takeaways that I think are important. One, this transaction demonstrates the new ATN's ability to act quickly and opportunistically to complete a major strategic transaction, which speaks to both our strong financial position and our flat organizational structure. And 2, our operating platform, track record and expertise make ATN a perfect partner for financial investors, such as Freedom 3 Capital in this case, seeking to invest in communications infrastructure assets and businesses. We believe there will be more opportunities like this and with a projected post-transaction net leverage ratio of less than 2x, we have the financial flexibility to pursue them. So to sum up, ATN demonstrated significant resilience in 2020 with strong positive performance from our communications services businesses. 2021 will be a year of additional spending and compressed margins in our domestic telecom business, but we are investing in areas that should provide growth and better economics in the medium term. We are looking ahead to further improvements in our International Telecom business in 2021 and to the completion of the Alaska Communications transaction in the second half of the year.

Justin Benincasa, Chief Financial Officer

Okay. Thank you, Michael. For the fourth quarter, total consolidated reported revenues were $123.7 million, up 10% from last year's $112.1 million. Adjusting for construction revenue related to the FirstNet build, revenue was up slightly from last year. Adjusted EBITDA for the quarter was $30.5 million, an increase of 7% over 2019 adjusted EBITDA of $28.5 million. Looking at the segments and starting with International Telecom. Fourth quarter revenues were up slightly to $83.8 million from last year and adjusted EBITDA increased 6% to $28.1 million. The pandemic caused us to quickly pivot to accelerate implementation of new digital solutions and processes within our businesses, including the rollout of electronic bill payment and other automated services across our markets. Thus, we were able to quickly gain operating efficiencies in many of our international markets during the year. This quarter's net income also reflects an increase in our ownership in One Communications, our Bermuda and Cayman Islands company, to approximately 70%, up from 51% following the original transaction. Capital expenditures in this segment totaled $38.9 million for the full year, coming in lower than originally expected as some of our planned capital spending was delayed or slowed due to the pandemic. With adjusted EBITDA for the year totaling $114.3 million and reduced capital expenditures, we saw significant free cash flow generation in this segment in 2020. We expect most of the 2020 delayed capital spending to occur in 2021 and segment capital expenditures to be in the range of $45 million to $55 million for the year. In the U.S. Telecom segment, fourth quarter revenues totaled $38.7 million, up from $27.8 million a year ago, mostly due to the $10.5 million of FirstNet construction revenue I noted earlier. Currently, we expect to complete an additional 50% of the $85 million construction project this year for FirstNet. Adjusted EBITDA for the segment was $7.2 million, down from $8.3 million in the fourth quarter of 2019. This included net additional operating costs of $1.5 million for the quarter and approximately $6 million for the year associated with our early-stage private network business. Looking into 2021, we expect full year investment spending on private network to increase to roughly $12 million as we expand the product development and sales effort that Michael noted earlier. In addition, as FirstNet sites come online and revenue shifts from wholesale roaming to maintenance and rental income, there will be increased operating expenses associated with the new sites. This increase in operating costs will be somewhat mitigated by lower network capital costs as the wholesale roaming traffic comes off the network. We are also pleased to be awarded $18 million under the CARES Act to build an additional 85 wireless broadband sites in partnership with the Navajo Tribal Utility Authority and we completed most of this build late in the fourth quarter. These 85 sites should be a good addition to our rural broadband going forward as we look to add more subscribers, but together with the FirstNet site costs, these increased network footprint will negatively impact EBITDA next year with increased network operating costs of $10 million to $12 million. We reported $30 million of capital expenditures for the year in this segment. A substantial majority of the spend was on network infrastructure expansion, primarily wireless base stations serving fixed broadband and retail customers, fiber and other backhaul and towers. Over $15 million of that was reimbursed mostly through the CARES Act. We expect to increase our capital expenditures in 2021 for this segment to $40 million to $50 million, which includes additional investments of approximately $25 million to $30 million for tower and backhaul construction. As noted in the release, we completed the sale of 67% of our equity interest in Vibrant Energy business in the first quarter of 2021 with consideration of approximately $21 million and the potential earn-out on an additional $6.3 million. Accordingly, we showed the assets and liabilities as held for sale and will no longer consolidate the operations going forward. For the quarter, we reported a total net loss of $20.5 million or $1.29 per share, inclusive of the $21.5 million loss on the sale of Vibrant Energy and $1.5 million in related transaction costs. The effective tax rate for the year reflects a mix of our country operations and benefits from the CARES Act, offset by no tax benefit from the Vibrant loss. We expect the tax rate to revert more to normalized levels in 2021. Also included in operating results for the quarter was $1.3 million of noncash stock-based compensation expense. Looking at the balance sheet and cash flows, we ended the quarter with total cash and short-term investments of $104 million and total debt outstanding of $72.8 million as we accelerated debt payments in the international segment by $10 million in the fourth quarter. In addition to $11 million in shareholder dividends, the company used approximately $37 million to increase our majority ownership in subsidiaries and to buy back ATN stock. As Michael mentioned, we expect our net leverage ratio to be under 2x after the completion of the Alaska Communications acquisition, which gives us substantial flexibility to invest in additional organic and inorganic growth initiatives.

Operator, Operator

Our first question is from Mr. Ric Prentiss from Raymond James.

Richard Prentiss, Analyst

I want to start with Alaska. The purchase price involves paying cash for stock and assuming the debt. However, how do we envision the funding process working between you and F3C?

Michael Prior, Chief Executive Officer

The funding is basically roughly 1/2 each on the equity capital needed.

Richard Prentiss, Analyst

And if I'm right, was that like $193 million that you're paying in cash to take out the equities portion?

Justin Benincasa, Chief Financial Officer

It should be a little less than that because we'll probably bring the debt level up.

Richard Prentiss, Analyst

I was wondering about the cash outflow for you and how much will be contributed. It's complicated with the partnership.

Justin Benincasa, Chief Financial Officer

Yes. I would plan the cash out the door for ATN in the $70 million to $75 million range.

Richard Prentiss, Analyst

Okay. How should we think about Alaska's guidance for revenues and EBITDA? You mentioned potential revenue synergies with the combination of the companies. What about the CapEx side? How much CapEx will be allocated with Alaska joining? Also, you indicated there could be private networks and other initiatives.

Michael Prior, Chief Executive Officer

I think it will be case, but we don't have specifics on that now, Ric. We'll be planning and we're ongoing planning on that. We're looking at that. They're focused on completing their fiscal year, having a shareholder vote approval. So I don't think we have a pencil sharp enough on that, but we have ideas. And I think it's largely opportunistic items. There is continuation of their existing strategy of building out fiber in a number of areas and they've done that with sort of an anchor tenant-funded model, and we see opportunities to continue to do that. So that's one area of capital expenditure. But the private networks and some of the maybe expansion or acceleration of some fiber, we'll have to revert once we've done more work on it.

Richard Prentiss, Analyst

Okay. And the Navajo Nation, it's a good project. Obviously, CARES Act helps, a population could really use that. How should we think about what the opportunity is to then grow the revenues on that? You mentioned you'll have some additional costs coming in. But how do we think about growing the revenues? And how are you going to report it?

Justin Benincasa, Chief Financial Officer

That partnership is already reflected in our numbers. It's an existing part of our U.S. business, and now we are expanding the network within that partnership. We expect to see subscriber gains, which will contribute to our revenue. However, we are starting late with the associated costs, and we will need some time to realize revenue from subscriber growth that surpasses our costs in 2021.

Richard Prentiss, Analyst

Yes. And how fast do you expect that to lease up? Is there a community commitment? Just trying to think of how fast do the revenues pace up to having put all the sites in place.

Michael Prior, Chief Executive Officer

There's no contractual commitment, but this is to provide broadband to people who don't have it, right? And by and large, they all want it. So we expect to sign up people pretty rapidly, provision them. And then I'll also add that there are tribal subsidies further and further subsidies envisioned in the plan just released by the Biden administration for a lot of communities like this that would subsidize their purchase of broadband services. So the net of all that is we certainly expect to add customers to the network quickly. That's the whole purpose of building it out for them. And that will include both residential customers and potentially some enterprise and education.

Richard Prentiss, Analyst

Great. Okay. And you bought out some more of the One Comm stuff. What's the best way for us to think about all the different investment levels you guys have as far as you own X percent in Bermuda, but you own a different percent of different operations, maybe bringing Alaska in at 50-50. Just trying to think of what's the best way for us to look at all the various assets you have and your ownership stakes?

Michael Prior, Chief Executive Officer

Well, I think there are two key points to consider. One is the math related to proportionate EBITDA, which we can calculate. However, the real value for us exceeds this proportionate figure because we benefit from the overall scale of all our operations, and we maintain control in all situations. So I believe we end up with something more advantageous than just the proportionate share. Additionally, this structure opens up opportunities for us. A good example is our situation in Bermuda; despite not disclosing specific prices, the stakes we acquired were highly accretive, as we bought them below the market's implied value of ATN as a whole. From a risk-reward perspective, this represents a smart move. As Justin mentioned, we initiated this deal by merging our existing operations in Bermuda and contributing additional cash for equity, which led to this business combination and granted us control. Over time, we have increased our equity ownership as well. This approach is beneficial because it allows us to allocate our funds across multiple investments while also enhancing our position as we encounter deeper opportunities within those investments. Overall, we are strong proponents of this model.

Richard Prentiss, Analyst

Okay. You mentioned that leverage will be under 2x after Alaska, indicating you have financial flexibility. It seems that there are many financial partners interested in opportunities. How should we approach the timing of utilizing the balance sheet? Are we looking at a situation where in 2021, as we move into 2022, there will be even more investments beyond what is happening right now?

Michael Prior, Chief Executive Officer

Yes, I think there could be. We don't have complete control over that. What we can influence is the development of our existing platforms, which we find appealing due to the high asset values in auctions. We believe it's more beneficial to expand our own assets. Therefore, we are investing significantly in our core network infrastructure and also advancing some new business ventures. Regarding transactions similar to Alaska and more substantial platform expansions, that will partly depend on our partners and the opportunities that arise. This particular case was unique, which is why our response was swift. We believe we can provide considerable value to financial investors, as some are buying into assets that may have greater operational complexity and risk than they realize. We think we can contribute positively, in addition to the synergies we have with our core operations. We are open to pursuing these opportunities, but we don’t fully control the timing apart from our willingness to continue. Additionally, it’s important to note that when we discuss leverage, we expect the acquisition debt associated with the Alaska transaction to be recourse only to that Alaska asset. Consequently, the capacity at the ATN level is somewhat higher than what the consolidated leverage ratio might suggest.

Operator, Operator

And our next question is from the line of Greg Burns from Sidoti.

Gregory Burns, Analyst

The $10 million to $12 million of incremental operating expenses you expect next year for the U.S. Telecom segment, what's the split of that between the transition from the AT&T contract and the Navajo Nation sites?

Justin Benincasa, Chief Financial Officer

I would say that most of it is more related to the FirstNet sites, so that's it, yes.

Gregory Burns, Analyst

Okay. I understand that you won't have the entire FirstNet network built next year. Will there be additional incremental costs associated with that? Or will expenses continue to increase as you complete the network?

Justin Benincasa, Chief Financial Officer

It's a good question. I think you might see expenses continue to rise as we complete the work, but we are currently ahead on some expenses related to the delivery of the sites. However, there may also be other costs in the existing wholesale that we could begin to manage more effectively. It's difficult to make a precise prediction at this moment, but there is likely to be an increase in certain costs.

Gregory Burns, Analyst

Okay. Regarding the remaining carrier services revenue, particularly the non-AT&T business, what is the trajectory of that business? Have there been any recent contract renegotiations? What pace of decline do you anticipate for the remaining portion of that business?

Michael Prior, Chief Executive Officer

Overall, we anticipate a decline in the long term, which may not be significant this year, but could be more pronounced in future years if we do not transition the business. We believe there is potential to offset some of that decline through our wholesale operations. However, if we only consider existing contracts without implementing any additional successful strategies, then we would face a decline.

Gregory Burns, Analyst

Okay. And on the fixed side on the U.S. Telecom, it's pretty good growth year-over-year. What's driving that growth?

Justin Benincasa, Chief Financial Officer

On the broadband, basically.

Gregory Burns, Analyst

Okay. I think you mentioned in the prepared remarks the government-subsidized programs. Are there specific projects that we should be aware of?

Michael Prior, Chief Executive Officer

It's a combination of factors. There's growth in retail broadband, enterprise expansion, and government programs such as E-rate in the education sector. We anticipate more of this in 2021. We are also constructing a new subsidized fiber route that will create new opportunities across these areas, as well as improve our penetration in residential broadband.

Gregory Burns, Analyst

Okay. And then in terms of the FCC support in the Virgin Islands, I think it's $16 million annually. What happens to that this year and next year?

Michael Prior, Chief Executive Officer

Once the program and application are approved, the first year will cover two-thirds of the funding for us. In the second year, it will cover one-third, and then it will conclude. However, we are contesting this and believe there's a chance for a different outcome. Based on the current award outcome, this is how it would proceed, and the process could begin at any time this year.

Gregory Burns, Analyst

Okay. Lastly, what is your current market share in the international wireless sector, and how much further opportunity do you see in that area?

Michael Prior, Chief Executive Officer

Yes. I think it depends on markets, but we don't break out the individual markets. However, when we look at the shares in some areas, we see significant opportunities to increase our share. In some instances, this is due to our launch of new capabilities, and in others, it has required us to refresh our sales and distribution approach. So far, we've seen encouraging results from these efforts over the past couple of quarters. We expect to continue in this direction and gain more share. However, I don't want to quantify that, as it wouldn't make sense overall since share is just one aspect, and there are varying ARPUs across different markets.

Operator, Operator

And we have one more question from Hamed Khorsand from BWS Financial.

Hamed Khorsand, Analyst

So just wanted to ask you. What kind of activities in sales and marketing are you doing on the private LTE front? And what are you seeing as far as the revenue bucket is concerned?

Michael Prior, Chief Executive Officer

Yes. We are expanding our sales force and enhancing sales support, including hiring sales engineers, and this process is ongoing. We are adding resources and have both direct and indirect sales channels. In certain areas, we are focusing on direct sales, and we have numerous partnerships, including those with municipalities and local education sectors. These partnerships can involve various components of the solution, such as system integrators, infrastructure owners, funders, and technical partners, all contributing to providing a comprehensive solution. We are actively pursuing both direct and indirect channels and increasing our efforts in these areas. Last year, our engagement and that of other market participants were slower, particularly in segments like hospitality and commercial real estate, which is understandable given the circumstances. Product demonstrations and similar activities have proven to be quite challenging. However, we are making steady progress and believe that this year will see improved engagement. We want to ensure that we have sufficient resources to effectively pursue these opportunities.

Hamed Khorsand, Analyst

So are the costs pretty much fixed in at this point, so just scale within this?

Michael Prior, Chief Executive Officer

No, we're adding resources gradually. We're doing this on a monthly basis. Eventually, if we don't see any sales activity, we will stop adding resources. So it's important to have contract wins. Right now, we're still in the phase of building up costs, which is why we mentioned it in our remarks.

Hamed Khorsand, Analyst

And as far as your remarks about the backhaul for U.S. Telecom, are you seeing any other traction with the customers other than the current FirstNet contract?

Michael Prior, Chief Executive Officer

Yes. We have been enhancing our backhaul capabilities in our operating region and are observing some progress. We anticipate further growth as we continue to expand. Historically, even on a smaller scale, adding new capabilities has led to successful revenue generation from wholesale to enterprise on new routes. These rural communities really require such improvements. If you are referring to carrier backhaul, we believe there will be opportunities in that area as well.

Hamed Khorsand, Analyst

Okay. My last question is about Alaska; once this deal closes, how will the reporting be structured? Since you will be consolidating it, will all the EBITDA be attributed to you, or how will you be reporting this?

Michael Prior, Chief Executive Officer

Yes. So it will be consolidated operations. And so yes, all the EBITDA would be shown. And then there's a minority interest back out.

Operator, Operator

And there are no questions at this time, sir. Turning it back to you, Mr. Benincasa.

Justin Benincasa, Chief Financial Officer

Okay. Thank you, everybody, for listening in. And we look forward to updating you more after the first quarter. Take care.

Operator, Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.