Earnings Call Transcript - ATNI Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the ATN International Q2 2024 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michele Satrowsky, Corporate Treasurer and Head of Investor Relations. Please go ahead.

Michele Satrowsky, Corporate Treasurer and Head of Investor Relations

Thank you, operator, and good morning, everyone. I'm joined today by Brad Martin, ATN's Chief Executive Officer, and Carlos Doglioli, ATN's Chief Financial Officer. This morning, we'll be reviewing our second quarter 2024 results. As a reminder, we announced our 2024 second quarter results yesterday afternoon after the market closed. Investors can find the earnings release and conference call slide presentation on our Investor Relations website. Our earnings release and the presentation contain certain 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 for 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. Lastly, a scheduling note. Historically, ATN has held earnings calls four weeks after the quarter's end. Going forward, we will be shifting the earnings call out a week and our Q3 call will be during the week of October 28. Now, I'll turn the call over to Brad.

Brad Martin, CEO

Thank you, Michele. Good morning, everyone, and thank you for joining us. We're making progress in our efforts to leverage our First-to-Fiber and Glass & Steel investments to drive top-line growth, improve operating efficiency, and deliver value to our shareholders and customers over the long term. Our second quarter performance is driving the business toward that goal. During the quarter, we grew adjusted EBITDA, delivered top and bottom line growth in our International Telecom segment, and benefited from cost-management efforts. We remain committed to managing the business prudently to improve our operating leverage and shifting the mix of our products and services to drive higher revenues, average revenue per user (ARPU), and margins, with an emphasis on high-speed data, mobile data, and enterprise services. We remain confident that we are positioning ATN to win in these markets with our upgraded network, localized sales teams, and enhanced leadership. Based on our first-half performance and the progress we are making delivering on our plan, we are reaffirming our 2024 outlook. I'll begin the call today by covering highlights from our second quarter performance and progress executing our strategy, before turning the call over to Carlos to review our second quarter financials and full-year guidance in more detail. Starting with highlights from the quarter, notably in Q2, we grew adjusted EBITDA by 6% year-over-year, supported by strong International Telecom segment top-line growth and benefits from the actions initiated at the end of last year and earlier this year to improve operating efficiency. Overall revenue declined 2% as growth in International Telecom was offset by an anticipated year-over-year decline in the US Telecom revenue, due primarily to the expiration of the Emergency Connectivity Fund program that we have previously discussed. During the quarter, we completed the sale of an international real estate asset, the result of a long-standing commitment to manage the business prudently. As shared last quarter, we also have further sharpened our focus on managing operating and capital costs. Carlos will expand upon the financial impact of the sale and progress with our cost-saving efforts in his remarks. A top priority for the ATN team has been to advance the carrier projects that were delayed in Q1 and sharpen our efforts to accelerate revenue conversion from these programs in the second half of the year. We made good progress with these efforts in Q2, having now addressed the major causes of the delays. We are off and running with the deliveries and schedules, keeping us on track to deliver on our 2024 outlook. Turning now to strategic and operational highlights. The growing demand for reliable high-speed data connections is ubiquitous in the remote and rural communities that we serve in the US and abroad. Through the execution of our First-to-Fiber and Glass & Steel investment strategies, we continue to enhance the quality, value, and longevity of ATN's fiber-rich digital network. This is incredibly important for positioning ATN to better serve our customers, defend and grow our market share, improve the mix of our business, and maximize our growth opportunities over the long term. As we move through the final year of our three-year investment cycle, we have begun to scale back the level of our investments with the goal of approaching more normalized capital expenditures by 2025. Our focus now is on supporting further expansion with more moderate CapEx investments while aggressively pursuing US government-funded infrastructure programs to supplement our growth. At the same time, our team is focused on harvesting the investments we have already made in our network to drive strong, sustainable recurring revenues, durable free cash flow, and enhanced shareholder value. We made notable progress with these efforts in Q2, as demonstrated by the growth we delivered across several key operational metrics. High-speed data broadband customers is a key metric to drive higher-quality revenues and margins and ultimately helps us unlock the full potential of ATN's assets. In the second quarter, we increased the number of homes passed by high-speed broadband to more than 403,000, up 22% from a year ago. We also saw continuous strength with our conversion of subscribers onto our high-speed network, with high-speed data subscribers increasing 141,000, up 9% compared with last year. Regarding overall broadband subscribers, it is important to note that as we build out our next-generation network, we also are intentionally decommissioning older legacy network as we optimize our network footprint and technology. As a result, by design, we are seeing broadband subscriber churn on these legacy low-speed networks. Now, taking a closer look at operational highlights by segment. Starting with our International Telecom segment, which represents about half of ATN's revenue, international sales increased 4%, adjusted EBITDA grew by $4.2 million as we benefited from a positive shift in our mix and grew ARPU. This includes growing several core high-value growth areas within the International Telecom segment. Notably, at the close of the second quarter, we grew gigabit-capable high-speed data homes passed by 2% year-over-year to 257,000 homes. In the same period, we grew international high-speed data broadband subscribers by 9%. On the business side in Q2, we completed the launch of Brava, our new business solutions brand across our international markets. We also once again grew revenue for International Business Solutions, which was up over 10% year-over-year, with international business mobility revenue growth of 40% year-over-year and international fixed business revenue growth approaching 9% year-over-year. In international mobility, while overall revenue was relatively flat year-over-year and churn increased slightly, we made progress improving the quality of our subscriber base by converting customers to higher margin services. This is demonstrated by the increased business mobility revenue growth I just mentioned. Additionally, we increased the number of prepaid and postpaid mobile data plans subscribers by 9% year-over-year. In Q1 and Q2, we deployed new 5G networks, and these favorable data adoption trends position ATN to maximize the returns on these investments into the future. Finally, I want to note that the churn in mobility is primarily non-plan prepaid voice customers, which are our lowest ARPU and margin subscribers. Turning to our US Telecom segment, which accounts for the other half of ATN's revenue. Our focus in the US remains on driving high-speed broadband uptake, supporting carrier transitions, leveraging grant funding, and expanding our enterprise business opportunities. Additionally, we continue to advance several important operational milestones within our US markets. At the close of the second quarter, we increased broadband homes passed in the US by high-speed data by 85% year-over-year to more than 146,000 homes. As expected, the Q2 impact of the Affordable Connectivity Program expiration was immaterial and we continue to expect the full-year impact from ACP to be minimal to ATN's revenue and net-neutral to our profitability. The temporary headwinds from these government programs rolling off have been considered in our guidance, and our mitigation efforts are working as planned. Before turning the call to Carlos, I want to reiterate that our priorities for 2024 remain unchanged. We are focused on leveraging our upgraded network assets and localized operations to convert high-value revenue opportunities while managing the business prudently to protect and grow margins. As we complete the final year of our investment plan, we are bringing CapEx down, but continue to support targeted network expansions through a combination of internal and government grant funding. And we are prudently managing our balance sheet with the goal of lowering our leverage over time. I want to extend my gratitude to the ATN team for their hard work and dedication, as well as to our customers and partners for their continued trust and support. We are confident in our ability to achieve our goals for 2024 and deliver sustainable growth for our shareholders over the long term. And with that, I'll hand the call over to you, Carlos.

Carlos Doglioli, CFO

Thank you, Brad. Good morning, everyone, and thanks for joining us today. As Brad highlighted, we're making progress in our efforts to leverage the investments we have made to grow revenues in key areas while also improving the operating efficiency of the business. Our second quarter performance demonstrates progress against these objectives, and we remain committed to advancing these efforts moving forward. Let's review our second quarter financials. Total company revenue of $183.3 million was down 2% compared with the same period in 2023. As anticipated, the step down in revenue occurred primarily due to the discontinuation of the Emergency Connectivity Fund program in early April. In the quarter, we were encouraged by a strong performance in our International Telecom segment, specifically high-speed data subscriber and fixed revenue growth. Operating income in the second quarter was $24.3 million versus $2.4 million in Q2 of 2023. The increase was primarily due to a gain of $15.9 million on the sale of a non-core real estate asset in the International Telecom segment. SG&A expenses were lower across the operations, driven by our cost management efforts. Additionally, lower depreciation and amortization expense contributed to the improvement. Net income was $9 million and $0.50 per share, reflecting the $15.9 million gain and operating expense reductions. This compares with the prior year's net income of $0.8 million and a loss of $0.03 per share. Adjusted EBITDA for the second quarter was $48.7 million, up 6% from the year-ago period, reflecting lower operating expenses, which more than offset the decrease in revenue. Looking now at the segments’ performance, beginning with our International segment. Revenues increased 4% to $95.4 million. Our International segment experienced strong year-over-year high-speed data subscriber growth, resulting from the network expansion efforts and technology investments of the past several quarters that contributed to the 4% increase in fixed revenues. Higher revenue and the benefits of the restructuring efforts executed last year and in the first quarter led to a 14% year-over-year increase in adjusted EBITDA to $33.3 million. We expect to continue to benefit from the restructuring efforts throughout 2024. In our Domestic segment, Q2 revenues were $87.9 million, down 7% year-over-year due to the expected discontinuation of the Emergency Connectivity Fund program, the de-emphasis of mobility, as well as the impact from the wind down of the Affordable Connectivity Program, which came in line with expectations. Adjusted EBITDA for the Domestic segment was $21.9 million, down 4% compared with the prior year. Revenue-related headwinds were partially offset by a reduction in costs associated with the lower revenue, as well as the prior year restructuring and the benefit of more recently-initiated cost-management efforts. Moving on to the balance sheet and cash flow highlights. We ended the quarter with a net debt-to-adjusted EBITDA ratio of 2.45 times on total debt outstanding of $541 million. Net cash provided by operating activities for the first half of 2024 was $53.5 million, down from $60.3 million in the prior year period, driven primarily by an increase in interest expense associated with a higher level of debt versus prior year period. Turning now to capital expenditures. CapEx during the first six months of the year totaled $61.8 million, net of $46.2 million of reimbursable capital expenditures. This compares to $89.5 million, net of $7 million in reimbursable capital expenditures in the prior year. During Q2, we returned capital to our shareholders through $3.7 million in dividends and $9.9 million in share buybacks. Transitioning now to cost management and guidance. Looking at our margin improvement efforts, there are three areas of focus for ATN in 2024 and beyond. The first is realizing the benefit from the cost-cutting programs that were rolled out late 2023 and in Q1 of this year. As mentioned, we had benefits in Q2 from these programs, and we expect to derive further benefits in the second half of the year. The second area of opportunity is near-term cost management actions that our team has and will continue to pursue to better align our cost structure with the current operating environment. We believe these efforts will yield continued savings throughout the year, which are reflected in our guidance. In parallel, we also continue to shift our strategy for the third area of opportunity, which is longer-term operational efficiency. Here, we are identifying structural operational opportunities to further streamline costs and drive lasting margin improvement in 2025 and beyond. Our team has made good progress in identifying opportunities, and we continue to finalize our plans in this area. We look forward to sharing more detail in the coming months. With that, let's move to our 2024 guidance. Today, we are reaffirming our full year 2024 outlook given our Q2 results and the progress made on our efforts to grow profitable revenue streams and advance our margin improvement opportunities. We continue to expect revenues in the range of $730 million to $750 million for the full year, adjusted EBITDA in the range of $190 million to $200 million for the full year, capital expenditures in the range of $100 million to $110 million, net of reimbursed amounts. And lastly, we continue to expect to exit the year with a net debt ratio of 2.25 times to 2.5 times. We continue to monitor the net debt ratio as it could move above the range in the short term due to working capital needs driven by the timing of reimbursements. Our objective remains to bring down leverage closer to 2x over the medium term. In closing, our focused execution on strategic initiatives is driving improved performance. We expect to deliver on our 2024 outlook and continue executing our strategy, providing a solid foundation for future growth. Thank you for your attention. I'll now hand the call back over to Brad.

Brad Martin, CEO

Thanks, Carlos. We believe we have the right strategy in place to achieve our outlook for 2024 and position ATN to deliver exceptional value for our shareholders, employees, customers, partners, and local communities for years to come. Our enhanced footprint, talented team, and commitment to our mission position us to provide critical connectivity to our customers, grow in our markets, and deliver profitable growth, cash flow expansion, and value creation for our shareholders. With that, operator, I'd like to open it up for questions.

Operator, Operator

And our first question comes from Rick Prentiss of Raymond James. Your line is open.

Rick Prentiss, Analyst

Good morning, everyone.

Brad Martin, CEO

Good morning, Rick.

Rick Prentiss, Analyst

Hey, a couple of questions. The $16 million asset sale, I think you mentioned, was international real estate, non-strategic. What type of real estate was that? Are we talking towers? Is it buildings? And are there other non-core assets that you're thinking you could monetize?

Brad Martin, CEO

Yeah. So, Rick, that was really a piece of property. It's an undeveloped piece of land. So to give you some context on the asset. Look, we're always routinely looking at our asset portfolio to maximize shareholder value. So that's something that we're consistently doing. This process had been in place for multiple quarters. So hopefully that's helpful.

Rick Prentiss, Analyst

Yes, it is. And did the asset sale help inform the $10 million stock buyback? Or how should we think about why stock buyback was so high, maybe the stock price? But also kind of what you're thinking of the pacing going forward on shareholder returns from the stock buyback standpoint?

Carlos Doglioli, CFO

I understand, Rick, this is Carlos. The two processes were not necessarily related. The real estate sale was a process that had been ongoing for several quarters and it just reached completion at the beginning of the quarter. That's how those events occurred. Additionally, the share buyback program was established independently from that real estate sale.

Rick Prentiss, Analyst

And remind us of what's left on the authorized program and how you're thinking about pacing that given the leverage targets?

Carlos Doglioli, CFO

So there's another $15 million. But at this point, I don't have anything else to comment on.

Rick Prentiss, Analyst

Okay. That's fine. And obviously, the CapEx is net of reimbursement. The revenue is absent construction. How much construction revenue is there left to go this year as we look into the future years?

Brad Martin, CEO

So, it will continue to play a role, Rick. We still have some programs to finish that will carry on. However, we expect it won't be at the same scale as before. We will certainly see some construction revenue throughout the year.

Carlos Doglioli, CFO

I think the margin on that is not significantly impacting cash, which is minimal. I estimate it's around $5 million. I hope that helps.

Rick Prentiss, Analyst

It does, it does. And as you think about private multiples and public multiples, we've seen recently, obviously, T-Mobile work with an infrastructure company, EQT, and get involved in Lumos. We've seen T-Mobile get involved with private equity company KKR Infrastructure and take a big stake in Metronet. As you look at the private world out there, any updated thoughts on possibly joint venturing? Because private multiples still seem like they're well above public multiples.

Brad Martin, CEO

We believe the activity you mentioned aligns well with our strategy in Glass & Steel. The trend of larger mobile providers investing in fiber companies supports what we have been implementing through our First-to-Fiber and Glass & Steel initiatives. While I won't comment on specific processes, our Board regularly evaluates strategic opportunities, always considering the best options for our shareholders. These kinds of moves reinforce our confidence in having the right strategy, and we remain assured in our ability to generate ongoing shareholder value.

Rick Prentiss, Analyst

Okay. Maybe just a little broader strategic thought of, we've seen convergence kind of wireless with fiber broadband be higher in Europe. It seems to be happening in the US. But maybe just a little strategic thought on where do you think the US is in this process and how can it play forward?

Brad Martin, CEO

We are certainly monitoring those trends, and we have observed cable operators achieving some success with mobility solutions. We do this in our international markets as well where we provide mobile services. We view these trends as offering value in certain areas, but it largely hinges on the go-to-market strategy and the customer base available. It's important to note that our rural markets differ somewhat from those of the competitors and cable operators I mentioned earlier. We recognize the value in these markets and are closely observing this trend, actively leveraging it in some of our locations.

Rick Prentiss, Analyst

Great. Thanks so much.

Operator, Operator

And our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hamed Khorsand, Analyst

Hey, good morning. So first off, on the international side with the high-speed data customer gains, is that a function of the economies being stronger in your international markets? Could you just talk about that a little bit more of why the consumer is gravitating to that service?

Brad Martin, CEO

Yes, Hamed, it's a combination. We are operating in markets with strong economic tailwinds, such as Guyana with its oil discoveries. However, much of our success is due to demand, the investments we've made, and our strategy to be First-to-Fiber. We aim to provide excellent solutions for both consumers and enterprises in these markets, and we're ahead in this strategy in most areas, particularly in fixed line deployment. So it's a mix of factors; while there are some economic advantages, our success largely comes from executing the right infrastructure to meet market needs. The demand for high-quality broadband service is truly widespread and transformative, especially when we can deliver gigabit-capacity broadband solutions to homes in these markets.

Hamed Khorsand, Analyst

Okay. And then on the US front, from a Q1 comparison standpoint, was the entire revenue decline related to the ECF program?

Carlos Doglioli, CFO

I believe that the majority of it was driven by that. It was around over $25 million of revenues on an annualized basis, and that ended early in Q2. I think it was around $27 million or $28 million on an annualized basis. So…

Hamed Khorsand, Analyst

Okay. So if I map that out, I mean, the underpinnings in the US market was actually better since it declined to only $1 million or so, right?

Brad Martin, CEO

Yeah. Net of that ECF program, there was growth in our enterprise space, Hamed, in that market. So that was a significant contributor to revenue performance.

Hamed Khorsand, Analyst

Okay. My last question was, is there any more cost savings you could take advantage of?

Carlos Doglioli, CFO

Excuse me. I couldn't hear you, Hamed. Sorry.

Hamed Khorsand, Analyst

From cost savings, is there more that you could take advantage of? More cost cuts to come?

Carlos Doglioli, CFO

Look, I think when you look at our guidance and you compare the numbers on the first half and the expectations for the second half, you can see that the incremental impact of these efforts reflected in the margin improvement.

Hamed Khorsand, Analyst

Okay. All right. Thank you.

Operator, Operator

Thank you. Our last question comes from Greg Burns of Sidoti. Your line is open.

Greg Burns, Analyst

Good morning. The churn that you mentioned in the US from decommissioning some of your older networks, how many more quarters do you foresee that being a headwind? And when we look at the broader growth in your ability to monetize the broadband investments in the US, could you just talk about maybe some of the initiatives or programs you have in place to drive increased customer adoption in that market?

Brad Martin, CEO

Good morning, Greg. The churn I mentioned in my prepared remarks is influenced by some of the intentional new overbuilds associated with our new network deployments and technologies. We're rationalizing the network in certain areas, which means we're overbuilding in some and not in others. Where it makes business sense, we may be decommissioning parts of the network, and we expect this to be a challenge for a few more quarters. In Q2, the impact from ACP was minimal, but we anticipate a more significant effect in Q3, similar to other telecom operators. We're monitoring this closely, and it's included in our guidance. We're performing according to our expectations regarding ACP. However, we also see opportunities to increase penetration of the networks we are building, which counterbalances some of the churn associated with legacy technologies. The churn primarily affects our older technologies, such as DSL and some legacy fixed wireless broadband.

Greg Burns, Analyst

Are there any maybe forward-looking metrics like funnel or anything you could share with us that maybe gives you confidence in the opportunity or the potential growth over the next year or so from the broadband business in the US?

Brad Martin, CEO

Our forward guidance seems appropriate at this time. While we do not disclose specific funnel details, we are optimistic about utilizing the assets we have developed. There are clear opportunities for growth in both the consumer and enterprise sectors within our markets. The investments we have made and continue to make bolster our confidence in this potential. Additionally, we are beginning to see an increase in reimbursable capital expenditure programs, which are primarily government-funded initiatives. As mentioned in our earnings release, we currently have about $46 million in net reimbursable funds, a significant year-over-year increase. These grant programs and government-funded initiatives are starting to make meaningful contributions to our overall capital profile, presenting an opportunity for future expansion.

Greg Burns, Analyst

Okay. Great. And then internationally, on the wireless side, is growth there going to be coming more from ARPU expansion and subscriber growth going forward?

Brad Martin, CEO

It will be a mix of both. We are pleased with the data adoption movements we are seeing in the market, which has been very intentional. We have upgraded our networks in those markets and made investments that can leverage and support those trends for a significant period. This aligns with our goal of achieving higher quality revenue streams, and the growth in both prepaid and postpaid plan subscribers reflects that positive trend. The churn numbers for the aggregate subscriber counts we published primarily concern prepaid voice only, which have very low ARPU and overall low revenue.

Greg Burns, Analyst

Okay. Thank you.

Operator, Operator

Thank you. This concludes the question-and-answer session. I would like to turn it back to Brad Martin for closing remarks.

Brad Martin, CEO

Well, thank you, everyone, for joining today. We look forward to speaking with many of you in the months ahead. So thank you again for your time, and we'll talk soon.

Operator, Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.