Earnings Call Transcript - ATNI Q2 2021

Operator, Operator

Good day, and thank you for joining us. Welcome to the ATN International Q2 2021 Earnings Call. I will now turn the conference 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 second quarter 2021 results and to discuss our recent Alaska Communications acquisition. With me here is Michael Prior as Chief Executive Officer. During this call, I’ll cover the relevant financial information. As Michael usually provides 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 contains forward-looking statements relating to 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, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC. I should also note that the SEC filings for Alaska Communications up through the first quarter of 2021 can be found on the website, alsk.com. We’re still finalizing the business fiscal purchase accounting and expect to file our 8-K that will include the pro forma financial results around the end of September. And with that, I’ll turn the call over to Michael.

Michael Prior, Chief Executive Officer

Thank you, Justin. We are pleased to close the acquisition of Alaska Communications last week, more or less on the timeline we expected. As we discussed on previous calls, we are excited about both the near and long-term opportunities here and think this is an excellent fit from our operating portfolio and extension of our core business strategy, which is building and operating critical communications infrastructure into more remote and challenging markets where we can maintain a long-term competitive advantage. I will provide more thoughts on this addition shortly. Otherwise, our existing businesses performed well overall for the quarter, with solid revenue growth led by broadband and global additions. We did experience higher year-on-year expenses against an extraordinarily low second quarter last year when many expenses were usually reduced or mitigated by government action. Added to that were expense increases in several categories, including regulatory and some unusual expenses, which we don’t expect to continue into the current quarter, including a legal accrual. I’ll turn it back to Alaska. For the past few years, this business has had good success growing its business and wholesale revenue, which now represents over two-thirds of revenue and much of that is under multi-year contracts. We expect that strategy and success to continue as we leverage fiber facilities built on an anchor tenant return model and look for broad opportunities to generate incremental cash flows on those facilities, at the same time as we continue to pursue additional strategic builds. We’re also exploring opportunities to refine and accelerate their business strategy. These include taking advantage of recent fiber builds at Northwest. And SDU business and providing resources to better pursue public-private partnerships, managed services, and private network opportunities. We’ll speak more about that in coming quarters. In the meantime, I want to officially welcome Alaska Communications to the ATN family. Our teams have been off to a fast and productive start, and I am grateful for the very positive and forward-looking attitudes of all concerned. I also want to thank the internal teams who’ve got the deals done and are still working on the details of integration. Our financing partners Freedom 3 Capital and the bank led by Fifth Third Bancorp, as well as our financial legal advisers, are all critical to getting this done and will be just as critical moving forward. Thank you all. The U.S. telecom segment, which is going forward, will account for roughly half of ATN consolidated revenues. In the third quarter, a little over two months of results will be included in our consolidated results. Justin will add some more details on the balance sheet impacts as well in a few minutes. Sticking with the domestic businesses, our existing U.S. telecom business had a similar quarter to the first quarter this year with EBITDA at almost exactly the same level. These points are similar as well. The first that build continues on schedule and construction revenue for that is still more than offset by construction expense as expected. Spending on the developing private networks business also has continued at a similar pace compared to the previous quarter. Justin will provide some numbers on that. As we alluded to in the release, after reviewing the direction of progress for the underlying businesses in this segment, we concluded that while there are some important common operational resources, our rural business under the umbrella of common rural networks and our private networks business universe would be better served with a more formal operation, similar to how we pursue different markets in our international telecom segment. The businesses are distinct, and the customers that we’re pursuing and the services they’re offering have different attributes. Further, we see some interesting opportunities for both organic and strategic expansion. We may want to utilize strategic or financial partners to pursue those, particularly on the private network side. As for rural networks, we’re pursuing a fiber-first strategy of connecting rural communities. We are looking to utilize a combination of carrier wholesale customers, enterprise customers, and government incentives ticking at each community. We expect to complete two middle model fiber builds in northern Arizona in the current quarter. Nearly all of the construction cost is covered by government incentive payments to build into educational sites and provide high-speed data services. We are augmenting that build and expect to provide backhaul to wireless towers, data services to enterprise customers, and wholesale transport services to some local broadband providers. The business is looking to execute on more of this sort of ratio to connect to rural communities out West. In addition, our rural broadband revenue in these markets is growing roughly ten percent higher for the first six months of the year. We believe there’s room to grow selectively from here with network improvements and expansion, but our focus for now is on the enterprise and wholesale side. Moving to international telecom. Broadband growth was more essential for its story in international telecom. Subscribers increased by six percent year-on-year. While some of the largest bills are behind us, we are continuing to invest in expanding the reach of our fiber-based networks and on our overall capacity and quality. We see plenty of additional opportunity in broadband subscribers and enterprise revenue with our fixed data services while maintaining low levels of churn. Relevant to that, there are two developments worth noting in the Canada market. One, the government shows an innovative and forward-looking approach in removing charges from broadband services. They are focused on getting people connected for learning, business activity, and general quality of life. Second, another sign of change is how we have landed contracts to provide substantial fiber facilities in advanced mobile services, including private LTE to oil and gas customers, and we expect that to continue to grow. In the international telecom segment, mobile subscriber levels also continued to grow, continuing a trend from a year ago as a result of a number of measures our teams undertook to improve our competitive positioning in select markets. Year-on-year, we saw a sixteen percent increase in overall subscriber levels and an accelerated increase in prepaid and postpaid subscribers. Many subscribers on demand continue to lag behind. Expenses in the segment have risen for the second quarter in a row. As explained in our release, some of that was in the level of one-time costs, while some were increased regulatory expenses. Outside the one-time items, there are no quick fixes, but we will continue to improve operating efficiencies to manage expenses down where we can. In many areas as revenue opportunities related to the network expansions I referenced are a higher priority. We’ve been asked on previous calls about the impact and timing of the pandemic recovery. As an update, I note that most of our international markets are still feeling economic pain from very limited travel into and out of the market. We are encouraged by the pickup in leisure travel and are hopeful that the next twelve months will look better than the past twelve months and that it will stay that way for us. To recap and provide a bit of a higher-level perspective following this major chain reaction, more than three-quarters of our revenue is mostly recovering, driven through the operation of a collection of domestic and international communications services companies, operating in smaller and more typical mobile markets, and in each case, have substantial infrastructure, a strong and extensive track record in their markets as either the first or second provider of relevant services and infrastructure, with good momentum around their core service offerings. We believe we can continue to expand in these markets as the light markets. The remainder of our business, which is domestic, is comprised of a small but growing rural fiber and broadband business that has simpler attributes compared to those more geographically distinct markets. A wholesale wireless business engaged in multiyear restructuring, and an emerging private networks business. We are working to create additional value and a clear story around those latter assets. For now, if we simply annualize the first half performance for both ATN and Alaska, ATN would have annual revenues of about $740 million, with the vast majority derived from recurring and contracted sources and adjusted EBITDA of about $160 million. We believe that is a great platform on which to create value. With that, I’ll turn it over to Justin, but just note we are hearing feedback that the call quality has been a little rough. We’re going to continue. We hope you can hear us well enough to understand.

Justin Benincasa, Chief Financial Officer

Thank you, Michael. For the second quarter, total consolidated revenues were $123.9 million, up 14% from last year, and consolidated adjusted EBITDA was $25.2 million versus $29.1 million in the second quarter of 2020. I’ll speak to the specifics of these comparisons as I cover the segment details. Starting with the International Telecom segment, revenues were up 8% from $80.1 million last year to $86.2 million this quarter, and adjusted EBITDA was $28.4 million, slightly down from $28.7 million a year ago. As Michael mentioned in his comments, segment revenue benefited from broadband and mobile subscriber growth in several markets, but we’ve seen higher expenses compared to last year, which led to a modest decline in adjusted EBITDA and reduced margins. Expenses in the prior year benefited from several temporary savings related to reduced operations and delayed maintenance during the pandemic. In addition to those costs returning this year, we had increased costs related to the expansion of our managed service business, higher regulatory and license fees in certain markets, and we also incurred a $1.1 million one-time legal expense in the quarter. As in past quarters, we continue to opportunistically purchase minority owner shares in One Communications, our Bermuda and Cayman Island subsidiary, and now own approximately 78% of the outstanding equity of this well-performing business, compared to 59% a year ago. Capital expenditures in the quarter were $11.3 million for this segment and $21.8 million year-to-date. For the full year in this segment, we expect to be at the higher end of our guidance of $45 million to $55 million. In the US Telecom segment, revenues were $37.6 million for the quarter, up from $28.2 million a year ago. This includes $9.3 million of construction revenue related to the FirstNet project. We still anticipate completing 50% of the $85 million project this year, which will bring us to approximately 65% completion at year-end. The decline in adjusted EBITDA for the segment to $4.5 million from $7.5 million last year was due to higher operating costs we discussed last quarter, which includes the operating costs associated with the completion of the Cares Act funded build-out of our rural broadband sites, and that’s in advance of the anticipated additional revenues in the FirstNet sites coming online. In addition, we spent $3.1 million on our developing private network business in the quarter, which was $1.3 million over last year. As noted in the release, from the July 22 close through the end of this year, we expect the Alaska acquisitions to contribute between $105 and $109 million of revenue to our US Telecom segment and between $27 and $29 million of adjusted EBITDA. With regards to cost synergies, we expect to achieve approximately $2 million of cost savings in the next 12 to 18 months. Similar to past ATN transactions in new markets, we’ll work to gain cost efficiencies and margin improvement over time, where they make sense and don’t impede our ability to continue growing the business. Capital expenditures in the US Telecom segment this quarter were $3.9 million and $18.8 million year-to-date. We expect capital expenditures in the U.S. segment to be at the higher end of our guidance of $40 million to $50 million, excluding Alaska, and for Alaska to continue at similar levels to the first half as they continue with several customer-specific fiber builds and network expansion. Consolidated net income for the quarter was $2 million or $0.13 per share, and was helped by a tax benefit of $1.5 million. Included in the operating expenses for the quarter was $2.2 million of non-cash stock-based compensation expense. Moving to the balance sheet. On June 30, total cash and short-term cash investments were $96 million, and total debt outstanding was $71 million. Excluding the FirstNet customer receivable credit facility put in place to monetize the structured payment receivable under the contract. This facility is secured by those customer receivable and has no recourse to ATN. Subsequent to the end of the second quarter in conjunction with the completion of the Alaska Communications acquisition, ATN borrowed $73 million to fund its equity portion of the transaction and subsequently repaid $10 million of that borrowing. We also facilitated a new credit agreement that Alaska Communications entered into at the close that is non-recourse to ATN; Alaska borrowed $210 million under that term loan facility and $110 million under the $35 million revolving facility. For the consolidated company, including Alaska, our leverage is slightly over 2x and approximately 1.6x on a net cash basis, still giving us substantial resources to fund additional growth initiatives. And with that, operator, we’d like to open the call up for questions.

Operator, Operator

Our first question comes from the line of Rick Prentiss from Raymond James.

Rick Prentiss, Analyst

It was a bit unclear initially, but things improved as the call went on. I have a couple of questions and hope you can hear me clearly. We are looking at the information on Alaska, particularly regarding the second quarter and year-to-date figures. How should we interpret what Alaska signifies for your segment reporting? Are there going to be any additional changes? What should we expect from Alaska's reporting and your reporting style?

Justin Benincasa, Chief Financial Officer

It’s going to be a bit of a hybrid approach. We plan to report more by line of business while also considering customer business. Essentially, we will provide a blend of both in the segment. Our primary reporting will focus on the type of service, with additional breakdowns by customer type.

Rick Prentiss, Analyst

And appreciate the color on the Alaska CapEx. It looks like they spent about $22 million in the first half. So we’re expecting maybe $22 million in the second half. Mentioned finished some customer orders, how should we think longer-term about what the capital intensity you guys will be spending at Alaska but in total, really?

Michael Prior, Chief Executive Officer

I think I’ll start and Justin can add. Right now, we see significant opportunities for new fiber builds, many of which will have the anchor tenant construct I mentioned. There’s a gross capital expenditure number, and a considerable portion of that is expected to be reimbursed. More broadly, we believe there are opportunities to continue expanding the network, which should yield good returns. Therefore, we anticipate substantial capital expenditures in the near term.

Rick Prentiss, Analyst

It makes sense, and it's great to receive the reimbursements. Do you report that as a net capital expenditure? I recently spoke with a tower company, and they mentioned that accountants require them to report reimbursed capital expenditure through revenues and EBITDA as amortization of prepaid rents. How does that reimbursement work for you? Is it truly considered a net capital expenditure?

Justin Benincasa, Chief Financial Officer

Are you referring to the reimbursable CapEx we spoke about? Yes.

Rick Prentiss, Analyst

And also, I think Michael has talked about how sometimes you’ll get government incentives back also?

Michael Prior, Chief Executive Officer

Yes, I mentioned that we have several types of capital expenditures, including those where we receive repayment from customers and anchor tenants through nonrecurring charges, which will appear as revenue. The total capital expense will be allocated accordingly. Most government programs require us to record the full capital expenditures and revenue. Justin, I’m not sure if you want to address that, but in the past, we have had situations that could relate to future programs we may consider.

Justin Benincasa, Chief Financial Officer

Yes. It does depend on the flavor of it. I’d say we have both reporting both ways for the most part. We've found that some are accounted as CapEx, and others come as revenue. But I will say that the deal that Michael referred to is contra CapEx.

Rick Prentiss, Analyst

When you receive it or book it as revenue, does it come in a lump sum or is it distributed monthly, quarterly, or annually? I am trying to align revenues with cash flow.

Justin Benincasa, Chief Financial Officer

Yes. There are high cost support items that will come through revenue. I'm not sure about the tower company you're mentioning, but the grants that Michael referred to mainly come through as contra CapEx for us, Rick.

Rick Prentiss, Analyst

Okay. That helps.

Justin Benincasa, Chief Financial Officer

Let’s just clarify that.

Rick Prentiss, Analyst

And then obviously, you guys are seeing some interest in your accelerating your growth with possibly some pools of funds that might be out there. Can you talk a little bit about are you thinking pension funds, infrastructure funds, obviously, a lot of money chasing opportunities? But how should we think about what kind of magnitude or potential partners they might involve?

Justin Benincasa, Chief Financial Officer

Can you repeat that, Rick? Yes.

Rick Prentiss, Analyst

You mentioned in the press release about potential strategic partners and funding. How should we think about the available pools? Is that pension fund, infrastructure funds, private equity funds? And what kind of magnitude might these partnerships kind of entail?

Justin Benincasa, Chief Financial Officer

I don’t want to speculate on that. I think the size will depend in part on how we use the proceeds. If we are engaging in two-step deals that involve combining or extending the business through strategic transactions, then the size will be larger. From the rural business perspective, it’s more likely to attract infrastructure-oriented partners, while the private Networks business might appeal more to private equity or strategic partners. However, there are indications of potential infrastructure interest in that area as well.

Rick Prentiss, Analyst

Okay. A lot of money out there for sure. Final one from me is, obviously, headlines coming out of Washington with Biden apparently getting bipartisan support for an infrastructure bill. Rural broadband mentioned as one of the categories. How should we think about where you guys might be able to play in that space? I know it’s early, the legislation is just coming together. But give us an updated thought on DC infrastructure, what it might mean for you?

Justin Benincasa, Chief Financial Officer

Yes, regarding the RDOF program, which has seen some reductions in awards, the initial program was allocated up to $9 billion, with a lesser amount distributed. Currently, I understand that $65 billion is designated for broadband infrastructure under the ongoing legislation. Like many others, we are awaiting more information and specifics. We believe there are opportunities for us in this area and also in existing funds that have been allocated, which we are actively pursuing. We continue to develop projects today related to the Cares Act funding. We currently think it is more likely that these funds will come through state and local government distributions rather than a direct federal program. Although I might be mistaken, we see this as the more probable scenario. We believe this will benefit us because we have strong local connections, a solid reputation, and a capable team focused on identifying and pursuing these opportunities. Therefore, this is definitely on our agenda.

Operator, Operator

Our next question comes from the line of Hamed Khorsand from BWS Financial.

Hamed Khorsand, Analyst

So first off, I wanted to ask you about Geoverse. What are you seeing in that business from the demand side and opportunities that now you’re thinking that you could accelerate the growth of that business by seeking outside capital?

Justin Benincasa, Chief Financial Officer

The past year has been slow for many, including in the pursuit of private networks, partly due to the pandemic. However, we are witnessing renewed interest in private network and private cellular solutions as they address several challenges. The ongoing rollout and interest in 5G and even 4G technologies are leading to an expansion of use cases. We believe that the significance of these solutions could necessitate increased funding, as we have been focusing on developing a platform rather than just a unit-based infrastructure. This creates a larger opportunity but also requires more upfront investment. We are engaging with customers and partners who are considering this in a comprehensive manner, looking at multisite and multi-use case applications. If successful, these initiatives may demand considerable capital. While I can't provide specific figures, I hope this gives you an idea of our perspective on the matter.

Hamed Khorsand, Analyst

And then before you, ATN has primarily focused on wireless, but it seems that for this call and press release, you’re emphasizing fiber more. Can you share how many miles of fiber you currently have? Additionally, what are your expectations for adding more miles each year, and how costly are some of the areas you’re considering for these additions?

Justin Benincasa, Chief Financial Officer

Yes. I don’t want to do that now. I’m not sure I have the combined numbers in my head anyway. So not prepared to do that now. But I would just say two things to that, Hamed. First of all, we have had a fairly fiber-forward approach for a while in a number of markets. We did two transactions in 2016 in our international telecom that brought in substantial wireline assets, as you know, and we went and did multi-year fiber expansion in those markets and in an additional market. We’re seeing great uptake. We have a very low churn rate and continue to see multiple values for delivering fiber solutions. There are different flavors of it in different markets, as we talked about Alaska, for example, is very much business and wholesale driven with some retail as well. But in our offshore markets, it’s probably flipped the other way; most of it is more servicing residential broadband as the biggest unit there. It’s a similar approach of being one of the top or second provider of core infrastructure in these markets. Fiber is the core infrastructure. Now the mobile is still important in a number of our markets, and we’re doing well there. It’s just a different delivery mechanism in some ways, and it’s a little bit different product with full mobility. But it still requires all that fiber backbone these days because it’s all about data services, whether it’s connected or whether it’s fixed or mobile. So that’s the way I look at it. We could look at providing more data on that in the future, Hamed, too, on some of the fiber extension. I will be careful because some of the fiber mile information out there is kind of silly because it’s route miles that are obviously more useful than fiber miles. But it’s a little hard to do apples-to-apples comparisons because it depends on the use cases and the density.

Hamed Khorsand, Analyst

And then my last question was regarding Alaska. What is it that you think that you could improve upon in Alaska? How fast do you think you could generate those revenue synergies that you mentioned in the press release?

Justin Benincasa, Chief Financial Officer

Well, first of all, they’ve been doing a lot of things well. So we like their core strategy. It was pretty distracting the last few years. They’ve been considering strategic alternatives. They, of course, had an active shareholder involved and were going through a process. Since then, we’ve been effectively going private, which allows us to really focus on business and business first without any other distractions. We’re trying to give them that. We have some operational capabilities and know-how that they’re excited about. They think we can help them execute on their plan. That’s part of where our optimism comes from. It’s hard to say how fast it comes; it’s interesting with builds in Alaska. Some things you just can’t build in the winter, of course. Some of it will take time, but we see opportunity. Our focus is on growing it and generating stable, strong, long-tail, recurring cash flow streams. That incrementally will drive value.

Operator, Operator

Our last question comes from the line of Mr. Rick Brandis from Raymond James.

Rick Prentiss, Analyst

Appreciate a couple of follow-ups. First, Justin, you called out a $1.1 million one-time legal cost in the second quarter. Was that in the international segment? And what was that?

Justin Benincasa, Chief Financial Officer

It was in the international, yes.

Rick Prentiss, Analyst

Anything specific we should be looking at as far as what it involves?

Justin Benincasa, Chief Financial Officer

No, we don’t want to get into too much detail, but hopefully, it’s once and done.

Michael Prior, Chief Executive Officer

It doesn’t have anything to do with any ongoing business or personnel issues or anything like that.

Rick Prentiss, Analyst

Okay. That’s good to know. The international business also had continued a couple of quarters now of nice mobile subscriber growth. Talk a little bit about the trends you’re seeing there, why do you think you’re winning share into something you can continue to do?

Justin Benincasa, Chief Financial Officer

Yes. In certain markets, we realized that we needed to enhance our competitive positioning and retail strategy. We took several measures to address this, and it's been yielding positive results for four consecutive quarters. I believe this indicates a genuine trend, and it's encouraging. The focus was primarily on improving our competitive positioning and slightly adjusting our strategy in terms of retail and marketing.

Rick Prentiss, Analyst

Okay. That was it.

Justin Benincasa, Chief Financial Officer

Yes, I do. I think there’s also sort of macroeconomic lift in Guyana in particular, but not entirely; I think there’s other opportunities there.

Rick Prentiss, Analyst

Okay. And last one for me. A lot of similar questions on this question. When you’re putting in new fiber, what kind of strand counts are you putting in? Just not to the nearest strap, but just ballpark-wise, how much fiber are you putting in when you do new construction?

Justin Benincasa, Chief Financial Officer

It depends on the location, Rick. In denser areas of our international markets, I don't want to specify the strand count, but it’s very strand-rich. There are many more strands than you might ever need, which not only allows for future opportunities but also reduces costs, lowers latency, and provides a dedicated fiber pair for multiple uses. This is the direction the industry is heading. In long-haul scenarios, especially undersea, the strand counts are much larger. Even for mid and long-haul projects in the U.S., we tend to deploy a rich strand count because it offers more future opportunities.

Michael Prior, Chief Executive Officer

I’ve read some of those things that must have been faced; it might have been faced if I could be wrong about that at only 5,000 into their data set. Nothing like that.

Rick Prentiss, Analyst

Hundreds, makes sense.

Justin Benincasa, Chief Financial Officer

That’s all we have, operator, so we can end the call at that. We look forward to speaking with everybody in the next quarter.

Michael Prior, Chief Executive Officer

Sorry again about the technical difficulty starting out.

Operator, Operator

This concludes today’s conference call. Thank you. You may now disconnect.