Earnings Call Transcript - ATNI Q2 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the ATN International Second 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 second quarter 2022 earnings results. With me here is Michael Prior, ATN's Chief Executive Officer; Michael will be providing an update on the business and strategy as well as a high-level overview of our quarterly results. I will cover the relevant financial information and provide additional context where necessary. As a reminder, we released our second quarter earnings press release last night after the market closed. Investors can find the release and summary slides on this call or 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, please refer to our earnings release on our website at atni.com or to the 8-K provided to the SEC. And I will now turn the call over to Michael for his prepared remarks.

Michael Prior, CEO

Thank you, Justin, and welcome, everyone, to our second quarter 2022 earnings call. We delivered solid results in the second quarter driven by strong performances across our business and geographies. In line with our three-year plan, we are making progress in several business areas to lay the foundation for our long-term growth and expansion. A few highlights from the quarter help to illustrate this point. First, we have completed our initial year of operating Alaska Communications. We are pleased to announce that full integration is complete, with the acquisition expanding our overall U.S. footprint, and adding roughly 50% to our total segment revenues. I am grateful for the work of the ATN and Alaska teams in achieving this milestone. It was a large and complex undertaking, and we don't take success for granted. Second, we won a grant for approximately $10 million to deliver connectivity to homes and businesses in an area of Northern Arizona. Third, we invested more in increasing our infrastructure footprint and subscriber count in a number of markets, particularly Guyana. Lastly, we announced yesterday that we have entered into an agreement to acquire the largest private broadband provider in New Mexico, about which I will discuss more shortly. As noted on prior calls, 2022 marks the first year under our new growth strategy. This strategy is underpinned by our twin pillars of Glass and Steel, and being first-to-fiber. Glass and Steel represents our goal to build and own modern core digital infrastructure, while being first-to-fiber expresses our commitment to being the first to bring high-speed connectivity to a market. Our growth strategy complements and enhances our differentiated approach, focused on entering and servicing rural and remote markets with high connectivity demand. Many of these markets are characterized by lower socioeconomic demographics or harsh natural environments, creating a critical need for our solutions. Our deep experience, robust operating platform, and preference for partnering with local stakeholders allows us to enter many of these markets and deliver lasting change. This approach also has positive business implications. By focusing on serving customers first and providing an essential service, we can cultivate sticky relationships with durable cash flows. These cash flows are the lifeblood of our business, allowing us to reinvest in other growing markets that meet our criteria for traditionally underbuilt environments with low penetration. As mentioned, we recently won a grant for approximately $10 million in support of our Southern Apache County fiber-to-the-home project. This funding will allow us to deliver the promise of fiber to more than 11,000 residents and 4,000 homes and businesses in Southern Apache County. This is an area of the U.S. that currently suffers from significantly higher unemployment and poverty than the national average. We are hopeful that the dramatic improvement in the availability of high-speed connectivity our project will deliver will help to alleviate those conditions. High-speed connectivity can have a very positive impact on communities like this today by offering access to life-changing opportunities such as remote employment, the ability to sell goods or services through e-commerce marketplaces, distant learning, and telehealth. By focusing on what's most important and putting our customers first, we have continued to make solid progress across our key metrics. At the end of the second quarter, we had passed approximately 570,000 homes with our broadband networks, and had approximately 9,400 fiber route miles across those markets. We've also seen approximately 205,000 broadband subscribers, with 52% of those subscribers utilizing or capable of being connected to our higher-speed services. Turning briefly to quarterly results, we grew our total revenues by 45% year-over-year and adjusted EBITDA by 55%. This growth was mainly due to our expansion in the U.S. alongside network upgrades and customer additions across both our domestic and international operations. Our international segment remains reliable and highly productive. We continue to focus on maintaining and improving our market share in more mature markets and leveraging those cash flows to reinvest in other markets that are earlier in their growth cycles such as Alaska, Guyana, and Southwestern U.S. Our international segment's mobile business also continued to perform well. At the end of the second quarter, our total segment mobile subscriber base was approximately 349,000, a 9% increase from a year ago, with a faster rate of growth in the postpaid portion of that base. In the U.S., Alaska continues to be a steady and solid contributor, consistent with what we have seen over the past several quarters. We are generally happy with the progress made at this one-year mark of the acquisition. We have successfully integrated operations, helping us achieve greater synergies, increase market share, upgrade our capabilities, and improve resiliency. Going forward, we expect to increase the pace of investment in commercial activity as we look to satisfy more unmet demand. We also remain strategically active in the U.S. with our recent announcement to acquire Sacred Wind, the largest privately owned broadband company in New Mexico. We expect Sacred Wind's operations to integrate with our existing operations in that region. This acquisition is aligned with our broader corporate strategy, continuing our transformation towards becoming a leading provider of broadband fiber and other infrastructure-based services to carrier businesses, government, and consumer segments in and around our long-time operating areas in the Southwestern and Mountain West regions. We expect the combination to expand our footprint, capabilities, and development pipeline in the region. This investment will also further our mission of delivering positive social impact within the communities we serve, including those living on tribal lands of that region. We are excited to work with the team at Sacred Wind, and we look forward to providing more customers in New Mexico with affordable and reliable broadband connectivity. I would also like to congratulate our team in Arizona for their work with rural and remote tribal communities near the Grand Canyon. After completing our middle-mile and local fiber build, we began delivering connectivity services to these communities in the second quarter. We are pleased to see the positive impact of our solutions in these communities, notably their school systems. So, in summary, we have continued to make progress in both U.S. and international markets, growing our network footprint with state-of-the-art broadband connectivity, and increasing our overall subscriber count. Our Glass and Steel and fiber-first strategy complements our existing business capabilities well, and we are confident in our long-term success profile. Overall, we expect the investments that we have made in the first half of 2022 to support our annual and multiyear EBITDA growth projections. With that, I'll hand over the call to Justin for our financial results.

Justin Benincasa, CFO

Great. Thanks, Michael. In the second quarter of 2022, total consolidated revenues were $179.5 million, up 45% year-over-year. Operating income was $1.7 million versus $2.9 million last year, and adjusted EBITDA was $39.2 million, up 55% year-over-year. The increase in revenue and adjusted EBITDA was mostly due to the addition of Alaska, while the year-over-year decline in operating income was due to increases in network operating costs and sales and marketing expenses in our international segment, along with higher depreciation expense related to the acquisition of Alaska. Now turning to our segment breakdown, in international, revenues were $88.4 million, increasing 3% year-over-year. Mobile subscriber growth and higher carrier service revenues from increased travel to the U.S. Virgin Islands and Bermuda contributed to the segment revenue growth. These revenue increases were partially offset by the scheduled step-down in federal high-cost revenue support subsidies for the U.S. Virgin Islands, which we've noted previously. The next step down of $1.4 million is scheduled to occur in the third quarter of 2022. Adjusted EBITDA for the segment was $27.1 million in the quarter, down slightly from $28.4 million a year ago. This was due to higher operating costs, which offset the increase in segment revenues and the impact of the federal support step down as previously mentioned. Additionally, we're investing more in sales and marketing and customer support capabilities as well as network enhancements as we aim to grow the size and quality of our subscriber base at a more rapid pace. In our U.S. segment, revenues were $91.1 million in the quarter, more than doubling on a year-over-year basis due to our consolidation of Alaska's results. In the U.S., approximately 70% of our service revenues were derived from business and carrier services. FirstNet construction contributed $3.3 million to the segment revenues in the quarter. We've completed approximately 65% of the sites, and now expect to complete 85% of the build by the end of 2022, which is down slightly from our prior forecast of 90%. This is mainly due to the timing of permitting and approvals, which are moving slower than we had originally projected. Quarterly adjusted EBITDA in this segment was $20.6 million versus $4.5 million a year ago, mainly driven by the consolidation of Alaska. The net loss for the second quarter was $0.5 million or a loss of $0.11 per share as compared to a net income of $2 million or $0.13 per diluted share in the same period a year ago. Included in the loss this quarter was a one-time charge of $1.7 million related to dissolving a defined benefit plan. We reported $40.6 million in CapEx for the quarter, which includes $3.7 million of government and grant reimbursable items. The breakdown between U.S. telecom and international telecom CapEx was $21.7 million and $18.7 million, respectively. Now turning to our balance sheet and cash flows, we ended the quarter with total cash and cash equivalents of $71.1 million. For the first half of the year, cash provided by operating activities was $50.7 million, up from $27.5 million a year ago. Over the same period, we utilized approximately $33 million of cash to fund various working capital items, including prepaid circuits and FirstNet construction costs, as well as reducing payables and accrued balances. At the end of the second quarter, our total debt outstanding was $356 million. This amount includes $214.7 million of Alaska nonrecourse debt and excludes $40.6 million related to the FirstNet customer receivable financing facility. With a consolidated net debt-to-EBITDA ratio of under 2x, including non-recourse and parent-level debt, we continue to benefit from our balance sheet strength and resulting flexibility. In summary, we delivered solid results this quarter while continuing to invest in those areas that support our long-term growth strategies. This includes expanding our fiber coverage, upgrading our networks, and further penetrating existing markets such as Guyana. In terms of overall expense profile, we are seeing some increased inflationary pressure in various OpEx categories, including labor and customer handset equipment as well as CapEx increases for cable and wiring costs. Nevertheless, we remain confident in our underlying business prospects, and we're reiterating our full-year guidance for 2022, as well as our 2024 financial objectives. Thank you, everyone. I'll now turn the call back to Michael for his closing comments.

Michael Prior, CEO

Thank you, Justin. We delivered a strong performance across our businesses and markets in the second quarter. Both at home and abroad, we continue to strengthen our operations and position ourselves for enduring growth. Additionally, we are pleased to have announced the acquisition of Sacred Wind Enterprises, and we look forward to working with the team to deliver more opportunity through our solutions in the days ahead. And now operator, we'd like to open it up for questions.

Operator, Operator

Our first question or comment comes from the line of Hamed Khorsand from BWS Financial.

Hamed Khorsand, Analyst

Could you just talk about the opportunistic approach that you have with Sacred Wind? What made it so compelling to actually act now? And what are your plans with this acquisition?

Michael Prior, CEO

Yes. I think really, this is something we call a bolt-on acquisition. The advantage of it is it helps us accelerate the expansion of the transformation we've talked about in our forward business strategy in the Lower 48, and in that region. So it's broadband infrastructure assets in an adjacent market. We have strong synergy potential, and we think it's a great strategic complement for our subsidiary in that area. They also have an attractive pipeline in an area that we're interested in pursuing. They've done a good job of developing fiber growth, and they are quite adept at winning solutions where public-private partnerships exist, providing subsidies and incentives to connect people and communities. So it's a nice alignment with what we're trying to do with that business, and we believe it's really an acceleration of the organic plan.

Hamed Khorsand, Analyst

Okay. And then on that note, what are your goals with CapEx? Will it continue to be basically at the same level of EBITDA for the next couple of years with all the grant opportunities out there? Or could the Company begin to generate free cash flow again?

Michael Prior, CEO

We'll stand by that broader guidance we've given about what we're expecting and where that leaves us from a balance sheet standpoint. We discussed that a couple of quarters ago. One thing I would add is that the grants largely don't impact net CapEx. Sometimes, like in this Arizona project, we may have to put in a 10% match. But the grants themselves, I believe, will probably come through as contra CapEx, possibly reducing it. It is critical for our expansion strategy. Now is the time to be first-to-fiber and meet strong demand. Therefore, we will continue to invest in that program.

Hamed Khorsand, Analyst

Okay. And my last question is, are you able to comment on the media reports that you hired Goldman Sachs?

Michael Prior, CEO

No. As many companies do, we have a long-standing corporate policy not to comment on such rumors.

Operator, Operator

Our next question or comment comes from the line of Ric Prentiss from Raymond James.

Ric Prentiss, Analyst

I want to follow up on the past discussions. There is a lot of award and grant processes out there. Can you update us on what's happened in the last year? We saw some headlines that they're moving forward on some funding of projects. Have you been successful there? Perhaps an update on the FCC program? I think there's been some progress concerning what the government is thinking about. How should we think about where you're at in preparing for awards and grants?

Michael Prior, CEO

Sure. I'll address the grant issue last as it's somewhat complex. In terms of larger grants, particularly in Alaska, we have had some successes. We've launched service on some of the earlier programs there, but I would say there's more pending in what we think is late stages of approval and review in dollar amounts of grant than we have currently. As you understand, the total cost of ownership to deliver these services can be high, and it's crucial to assess the real economic impact rather than solely looking at the dollar value of the grants. The federal program with the $42 billion in grants is still in early stages. There's still considerable activity there, and we are participating in multiple markets.

Ric Prentiss, Analyst

No. Let's go on.

Michael Prior, CEO

As you might have seen, we were approved for something like $525 million in cost estimates for replacement and removal. The approved prorated allocation for that was about 40% of that amount, a little over $200 million. We are pleased with the approval, as it was very close to what we submitted. This is a reimbursement program, and we stand ready to step up to the obligations and engage in the program. Regarding funding gaps, the House has approved a bill to fill the gap. We are hopeful given the bipartisan support, but the timing for application and reimbursement remains something we're still working through.

Ric Prentiss, Analyst

Roughly any idea of the time frame of the replacement ahead of reimbursement?

Michael Prior, CEO

At this point, I don't have a specific timeframe for cash flow. We are actively managing this because these are significant numbers. The timing of cash in and cash out is critical, and we are working through those details. We've put agreements in place with some of the larger vendors to ensure they get paid when we do.

Ric Prentiss, Analyst

Okay. On another point, operational results came in roughly as expected, but the corporate other category did come in a bit higher on an EBITDA loss standpoint. What's the right run rate as we consider that corporate other line item?

Justin Benincasa, CFO

The biggest drivers in that line item are the shared service organizations and corporate. I would say Q1 was lower, while Q2 was higher due to some non-cash compensation charges. Going forward, we'll likely be slightly under the $8 million run rate in the back half of the year. Q1 was lower compared to Q2.

Ric Prentiss, Analyst

For adjusted EBITDA, do you take out all the non-cash items?

Justin Benincasa, CFO

No. We do not exclude non-cash compensation charges when calculating adjusted EBITDA, only transaction-related charges.

Ric Prentiss, Analyst

Got it. So to get to cash EBITDA, you'd need to make some adjustments for the non-cash charges.

Justin Benincasa, CFO

Yes, that would indeed require adjustments for those non-cash compensation charges.

Ric Prentiss, Analyst

There's a lot of companies pursuing a first-to-fiber strategy. How are you monitoring the markets you're in to ensure there's not oversupply? What are the advantages for being a public company compared to private companies doing the same?

Michael Prior, CEO

We pay close attention to the risk of oversupply of infrastructure in a market. We typically only pursue areas with undersupply, and we stay vigilant about local market conditions. While emerging players may create competition, we already have a significant understanding of our markets. As far as being public versus private, the key difference is the transparency required in our long-term plans, compared to private companies that may have funding without such scrutiny. We will continue to monitor our competitive landscape closely.

Ric Prentiss, Analyst

Looking at the New Mexico deal with Sacred Wind, the purchase price seems around a 5.7 multiple, with $57 million in cash and assumed debt and about $10 million of estimated annual EBITDA. How should we think about that multiple? What growth do you expect from this project, and is significant CapEx investment required?

Michael Prior, CEO

The cash and debt total $25 million in cash and roughly $32 million in debt assumed. The sellers will also take a small minority stake in the combined entity. There are opportunities for seller earn-outs, but I can say from a value standpoint, it's consistent with our trading and before synergies. The growth is primarily about developing their pipeline, which they have successfully achieved with organic cash flow. Some additional CapEx investment might be required post-integration.

Ric Prentiss, Analyst

What kind of growth rate do you anticipate in those markets?

Michael Prior, CEO

There's good growth potential. They started as a smaller provider and are now building out fiber. We see opportunities for copper/fiber conversions, but our focus is more on fiber expansion into new communities. This integration with our Commnet subsidiary could significantly contribute to growth.

Operator, Operator

I'm not showing any further questions in the queue at this time. I'll now turn it back over to Michael for any closing remarks.

Michael Prior, CEO

Thank you, operator. We appreciate your time and interest in ATN. Thank you all for joining us this morning.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.