ATN International, Inc. (ATNI) Q2 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the ATN International Q2 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Justin Benincasa, Chief Financial Officer. Please go ahead, sir.

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. And as Michael as usual 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 contains forward-looking statements relating to 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 detail on these measures and reconciliations to comparable GAAP measures. And to 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 the SEC filings for Alaska communications up through the first quarter of 2021 can be found on the website, alsk.com. And 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.

Thank you, Justin. We are pleased to close the acquisition of Alaska Communications last week, more or less on the time line we expected. As we have discussed on previous calls, we are excited about both the near and long-term opportunities here and thinking 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, of course, experience higher year-on-year expenses against an extraordinarily low in the 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. So 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 2/3 of revenue and much of that is under multiyear contracts. We expect that strategy and success to continue as we leverage fiber facilities built on an anchor tenant return model and look 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 bills at Northwest. And SDU business and providing resources to better pursue public private partnerships, managed services and private network opportunities. And we’ll speak more about that in coming quarters. In meantime, I want to officially welcome the Alaska Communication to the ATN’s 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 we’ll account for roughly 1/2 of ATN consolidated revenues. In the third quarter, little over 2 months of results will be included in our consolidated results. And Justin, will add some more details on the balance sheet impacts as well in a few minutes. So sticking with the domestic businesses from our existing US 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 the previous quarter. And Justin will provide some numbers on that. As we alluded to in the release, after reviewing the directions 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 the more formal operation, similar to how we pursue different markets in our International telecom segment. The businesses are distinct and the customers that are pursuing in services they’re offering have different attributes. Further, we see some interesting opportunities for both organic and strategic expansion, and they want -- we may want to utilize strategic or financial partners to pursue those, particularly on the private network side. As to 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. And then we look to certain the full scope of the markets communications needs directly or through local partners. As an example of that, we expect to complete 2 middle model fiber bills 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 10% higher for the first 6 months of the year. And we think 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 6% year-on-year. While some of the largest bills are behind us, we are continuing to invest in expansion of 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 2 developments worth noting in the Canada market. One, the government shows an innovative and forward-looking approach in removing that charges from broadband services. They are focused on getting people connected learning for business activity and for general quality of life. Second, another sign of change in 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. International telecom segment, mobile subscriber levels also continued to grow, continuing a trend 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 got a 16% increase in overall subscriber levels, accelerated increase on the prepaid and postpaid subscribers. Many subscribers on the demand continue is behind on what subscriber remains. Expenses rise in the segment for the second quarter in a row. As explained in our release, some of that was in the level of onetime costs and some of them increased regulatory other expense. Outside the long 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 for very limited travel of into and out of the market. We are encouraged by the pickup in leisure travel and are hopeful that the next 12 months will look better than the past 12 months and that staying for us. To recap and to provide a little bit of a higher level perspective following this major chain reaction, more than 3/4 of our revenue is mostly recovering, drive through the operation of a collection of domestic and international communications services companies, operating in smaller and typical mobile markets. And then in each case, have substantial infrastructure, a strong and extensive track record in market is either the first or second week provider of the relevant services and infrastructure and 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 atrophies to those more geographically distinct markets. A wholesale wireless business engaged in multi multiyear restructuring and an emerging private networks business. We are working to create additional value and a clear story around those ladder 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 resources and adjusted EBITDA of about $160 million. We believe that is a great platform on which to create value. And with that, I’ll turn it over to Justin, but I’ll just note that we are hearing feedback that says the call quality has been a little rough. We’re going to continue. But -- so we hope you can hear us well enough to understand.

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 of 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 modest -- 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 during this year, in addition to those costs returning this year, we had increased costs related to expansion of our managed service business, higher regulatory and license fees in certain markets, and we also incurred a $1.1 million onetime 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, and that compares 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 and $18.8 million year-to-date. We also 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 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 expense for the quarter was $2.2 million of noncash 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 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.

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

It was a little garbled a little bit like underwater, but things got better towards the end there. A couple of questions. Hopefully, you can hear me okay. We think the information on Alaska, showing the first quarter -- sorry, second quarter in year-to-date in there. How should we think about what Alaska means and how you guys report your segment reporting? Are there going to be some more changes? Should we expect well, Alaska itself reporting, your style reporting, how should we think about that?

It’s going to be a little bit of a hybrid technic. I think where we report more by line of business. They report by kind of customer business. So we’re going to basically provide it kind of a little bit of both in the segment. So we’re going to -- it will be mostly by -- our predominant reporting will be by type of service, and then we’re going to do further breakout by customer type.

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?

I think I’ll start and Justin can add. I mean, I think right now, we see fairly significant opportunities for new fiber builds, many of which will have the anchor tenant construct I talked about. So there’s a top line -- there’s a gross CapEx number, if you will. And then there’s -- there will be a fair amount of that. We expect will continue to be reimbursed. But -- but more broadly, we just think there are opportunities to continue to work on the network expansion they’ve been doing that should pay off well. So I think we expect significant capital expenditures in the near term.

Makes sense. And nice getting the reimbursements. You guys report that -- or would you report that as a net CapEx, I know having just gotten off a tower company call, the accountants make them report, reimburse CapEx through revenues and EBITDA amortization of prepaid rents. For you guys, how does that reimbursement come in? Is it really a net CapEx?

Are you referring to the reimbursable CapEx we speak there? Yes.

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

Yes. I mean, I just mentioned it. So we have a couple of different kinds. We have capital expenditures where there is repayment from customers, anchor tenants in the form of a nonrecurring charge. So that will come through revenue. And the full capital expense will be deployed. And then most of the government programs also have you recorded the gross CapEx and revenue. But there are, Justin, I don’t know if you can speak to -- we had in the past, had some contra actually could be with future programs we -- that could occur.

Yes. it does depend on the flavor of it. I’d say we have both reporting both ways for the most part. We have found actually is just strictly account of CapEx and others that do come as revenue. But I will say that the deal that Michael referred to contra CapEx.

And when you do receive it as -- or when you book it as revenue, does it come in, in a lump sum? Does it come in monthly, quarterly, annually? Just trying to match up revenues and cash flow type thing?

Yes. I mean, there’s things like high cost support, right? That will come through revenue. But I think the -- and I’m not quite sure on the tower company you’re referring to, but I would say that the grant things that we impact that Michael was referring to, those are mostly just coming through as contra CapEx for us, Rick.

Okay. That helps.

Let’s just make -- I just want to clarify that.

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?

Can you repeat that, Rick? Yes.

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 this -- these partnerships kind of entail?

I don’t want to speculate on that. I think the magnitude will depend in part on the use of proceeds, right? Are we giving 2 step kind of deals where we’re combining or extending the business with strategic transactions, then the magnitude will be higher, obviously. We don’t -- from the rural business is more likely to have infrastructure oriented partners and the private Networks business is more likely to have more private equity or strategic partners, but there we’ve seen signs that there could be infrastructure interest in there as well.

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 is 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?

Yes. I mean, look, I mean, if you think about that the RDOF program, which some of those awards have now been peeled back, but that first program was up to $9 billion and something less than that awarded. There’s -- and right now, from what I’ve read, $65 billion is earmarked for broadband type infrastructure under this build that is being pursued. Our -- like a lot of people, we’re waiting for more information and more details are -- do we think there’s opportunity for us in that? We do. And we also think there’s an opportunity in funds that have already been earmarked, and we’re pursuing some of that. We continue to build out some things even today related to the Cares Act funding. And our belief at this point is that it feels to us more likely that, that will come through state and local distributions as opposed -- from federal to state and local to 2 projects as opposed to federal nationwide program option. I could be wrong about that, but that’s how we’re looking at it as is more probable. And we think that will play well for us because we have good ties in the areas we are -- operate and a good reputation, and we have a good team for pursuing and analyzing those opportunities. So it’s absolutely on our radar screen.

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

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

I think that the last year was slow for a lot of us, including others in pursuing private networks, the pandemic did not help that. But we’re seeing the same -- we’re seeing the interest from multiple levels in private network solutions or private cellular solutions. There’s -- it just solves a number of problems. And with the continued -- with the continued distribution of 5G technologies and interest in 5G technologies and what it does as well as even 4G technologies. There’s -- the use cases are growing. So what we see that could make it more significant and require more funding is it’s -- we really are looking at what we’ve been doing is we’ve been developing a platform. It’s really a platform more than a sort of unit-based infrastructure build, which makes it a bigger opportunity, but it makes it also need more net funding in the short term. And then there are some -- a lot of the people we are talking to customers, partners are thinking about this in sort of big way, multisite ways, multi-use case ways. And so some of those applications, if we’re successful, will require -- could require a fair amount of capital. I don’t want to speculate on exactly how much and what, but I think that’s -- hopefully, that gives you a flavor for how we’re looking at it.

And then before you -- ATN has been mostly wireless centric, so now it sounds like for this call and press release, it was -- you’re focusing more on fiber. Can you disclose how many miles of fiber you have now? And what your expectations on adding how many miles per year and how costly is in some of the geographies that you’re looking to add those miles?

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 2 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 2 transactions in 2016 in our international telecom that brought in substantial wireline assets, as you know, and we went and did multiyear fiber expansion in those markets, an additional market. And so we’re seeing great take up. We’re seeing very low churn rate, and we continue to see multiple values for delivering fiber solutions. There’s different flavors of it in different markets, as we’ve talked about Alaska, for example, is very much business and wholesale driven with some retail as well. But our offshore markets, it’s probably -- it flip the other way. A lot of -- most -- it’s more servicing residential broadband is the biggest unit there. So there -- it’s a similar approach of being one of the top, you have the leading are second provider of core infrastructure in these markets. And fiber is the core infrastructure. Now the mobile is still important in a number of our markets, and we’re doing well there. So it’s just a different delivery mechanism, if you will, for -- 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 is obviously more useful than fiber miles. But that also is -- it’s a little hard to do apples-to-apples comparisons because it depends on the use cases and the density.

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

Well, first of all, they’ve been doing a lot of things well. So we like their core strategy. But they -- it was pretty -- I think it was -- they would tell you it’s pretty distracting the last few years. They’ve been considering strategic alternatives. They, of course, had an active a shareholder that involved and they were going through a process. And then since then, speaking closing approval. And so I think it’s just generally its ability to -- by effectively going private, it’s just really focus on business and business first and no other distraction. So we trying to give them that. We also have, despite their pretty good size, we have some operational capabilities and know-how that they’re excited about. They think we can help them execute on their plan. And so that’s part of where our optimism comes from. And then how fast it comes, it’s hard to say. In Alaska, it’s interesting with builds, right? There’s some things you just -- in some parts of the last, you can’t build as much in the winter, of course. And so some of it will take time, but we’re -- we see opportunity. And I think, what our focus is keep growing it and grow very stable, strong, long tail, recurring cash flow streams. And that incrementally will -- should really start to drive value.

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

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

It was in the international, yes.

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

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

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

Okay. That’s good to know. And then 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?

Yes. I think it’s mainly that in a couple of markets, we felt that -- and we talked a little bit about this a year or so ago that we felt that we needed to do a better job with our competitive positioning, our retail strategy. And so we undertook a number of steps to improve that. And it’s been bearing fruit since basically 4 quarters in a row. So I think enough to call it a real trend and really positive. So it really was just about improving our competitive positioning, shifting our strategy a little bit from the retail and marketing standpoint. Okay. That was it.

And I think there’s still room to continue to win success in the markets?

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

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?

It depends on the location, Rick, right? So if we’re doing it in denser areas in our international markets. I don’t even want to quote the strand count, but very strand rich. Many more strands than you think you’re probably going to ever need, And that just makes -- as you know, it makes the -- it’s not just allows you to be opportunistic in the future, but it lowers your cost, it allows you to reduce latency, have dedicated fiber pair for many uses. And so that’s the way the industry has been going. And it’s strands of class. So it’s the incremental cost of doing strand rich deployment is not much. Then if you go really on haul, you don’t put as rich in certain things, particularly in like subsea. Those are far, far for your strand counts in those situations. But even middle longer miles stuff in the U.S., we would tend to do pretty strand rich deployment just because it gives you future opportunity.

Right. And the incremental cost, like you point out, is not that much. There’s a lot of labor costs. So we’re thinking in the 100s to maybe thousands?

No. 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.

Hundreds, makes sense.

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.

And sorry again about the technical difficulty starting out.

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