Good day, ladies and gentlemen, and welcome to the Shenandoah Telecommunications Third Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce a host for today's conference, John Nesbett of IMS and Investor Relations for Shentel. Please go ahead, sir.

Good morning. We have Jen Belodeau for John. Good morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the quarter ended September 30, 2018. And our results were announced in a press release distributed this morning and a presentation we'll be reviewing is included on our Investor page at our website, www.shentel.com. Please note that an audio replay of the call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Chris French, President and Chief Executive Officer; Dave Heimbach, Executive Vice President and Chief Operating Officer; and Jim Woodward, Senior Vice President, Finance and CFO. After our prepared remarks, we'll conduct a question-and-answer session. As always, let me refer you to Slide 2 of the presentation, which contains our safe harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. These may cause actual results to differ materially from the statements. Shentel provides a detailed discussion of various risk factors in our SEC filings, which you're strongly encouraged to review. You're cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement. Also, in an effort to provide useful information to investors, we note on Slide 3 that our comments today include non-GAAP financial measures. Details on these measures, including why we use them and reconciliations to the most comparable GAAP measures are included in our SEC filings. These reconciliations are also provided in an appendix to today's slide presentation. I'll turn the call over to Chris now. Go ahead, Chris.

Thanks, Jen. Good morning, everyone. Thank you for joining us. Our third quarter results continue to build on our momentum from the first half of the year as evidenced by a solid revenue improvement, triple digit growth in operating income, enhanced net profitability and improved adjusted OIBDA performance. Our focus throughout 2018 has been on operational execution, maximizing the competitive advantage provided by our state-of-the-art network and the strength of our expanded wireless territory, which now reaches a market of more than 7 million people. We continue to focus on achieving higher distribution and activation levels across the markets we serve. We are continuing to monitor progress on the proposed Sprint-T-Mobile merger. We're optimistic that our long-standing affiliate agreement with Sprint position Shentel well for whatever outcomes reached. From a competitive standpoint, we believe a merger would be beneficial in establishing a stronger competitor against the much larger AT&T and Verizon. Shentel has had a successful relationship with Sprint during the past 20 years, especially in our rural market build-out, and we welcome the opportunity to continue to provide value to the new combined company. We look forward to more clarity as the future unfolds, but our current focus remains on continuing to grow our Wireless business while providing excellent coverage and service to our Sprint customers. Moving to our results. On Slide 5, you’ll see that revenue increased to $158.7 million versus $151.8 million in last year’s third quarter. This improvement resulted despite the $4.5 million impact to revenues related to the 2018 adoption of revenue recognition Topic 606. We saw a strong growth in operating income to $28.3 million in the third quarter, primarily related to a significant $11.9 million decrease in operating expenses. The decrease in operating expense was primarily due to the completion of the nTelos…

Thank you, Chris and good morning everyone. Let’s take a look at our quarterly results. On Slide 10, we share the changes in our operating revenue and net income. Revenue for the third quarter of 2018 was $158.7 million compared to $151.8 million in 2017 excluding the impact of Topic 606, revenues increased $11.5 million driven by the Wireless and Cable operations. Third quarter consolidated operating expenses decreased by $11.9 million. Excluding the impact of Topic 606, operating expenses decreased by $2.2 million due to the absence of acquisition costs related to the completion of the prior year and nTelos integration, and to the associated decrease in depreciation and amortization as we retired assets acquired in that acquisition. Our operating income increased $18.9 million or almost 200% over the prior year quarter. We recorded net income of $15.5 million or $0.31 per share compared to $3.5 million in the third quarter of 2017. Excluding the impact of the adoption of Topic 606, Q3 earnings per share was $0.24. Moving to Slide 11, you see our third quarter adjusted OIBDA results by segment, which illustrates the components driving the quarter-over-quarter change. Adjusted OIBDA for Q3 was $74.1 million compared to $66.9 million in 2017, representing an adjusted OIBDA margin of 46.7%. Continuing OIBDA is also shown on this slide to illustrate the impact of the waived Sprint management fee. As a reminder, when we acquired nTelos, Sprint agreed to waive the 8% postpaid and 6% prepaid management fees up to $4.2 million a month until the waived – total waived fee reaches $255.6 million. We expect to receive the benefit of the waived management fee through 2022. On Slide 12, we provide a detailed breakdown of the change between Q3 2017 and 2018 of wireless adjusted OIBDA, which increased $8.4 million…

Thanks, Jim, and good morning everyone. On Slide 17, we showed the components of change of our Wireless customer base from September 30, 2017, to September 30, 2018. We had 785,500 postpaid and 255,500 prepaid subscribers at the end of current quarter, for a total of 1,041,000 customers. This includes 54,000 customers acquired as a result of the Richmond Expansion in February 2018 and 34,000 added from organic growth. This represents growth of 8% in postpaid and 14% in prepaid as compared to the third quarter of 2017 and also a sequential improvement from the second quarter of 2018. At the end of the quarter, 21% of our customers were still on subsidized plans down from 22% at the end of the second quarter. 7.1% of our base upgraded their device in the quarter and of these upgrades, 98% were phones and 2% non-phones. Overall 8.5% of the postpaid base are now tablets and data devices. On Slide 18, we showed the gross and net activity occurring in postpaid within our Wireless segment. We had solid growth adds in the quarter with good conversion rates when we got prospects into the store. We also had a considerable improvement in our churn compared to last year. And we'll remind you that 2017 churn was impacted by losses associated with the migration of former nTelos subscribers to the Sprint network and platform. We continue to have a positive poured in versus poured out ratio at 1.35 to 1 for the third quarter of 2018. You also see postpaid churn for the quarter of 1.84%, a 35 basis point improvement versus the third quarter of 2017 with churn in our core legacy area at 1.68%. Phone churn was 1.7% and non-phone churn was 3.38%. Our significant progress in churn was aided by the…

Thank you. [Operator Instructions] And our first question comes from Ric Prentiss with Raymond James. Your line is now open.

Thanks, good morning, guys.

Good morning.

Good morning, Ric.

A couple of questions. First, with the Sprint-T-Mobile merger moving forward in at least the review process, I know you guys are in the process of if it's approved, they can look to buy you, you can look to buy theirs. Remind us again what happens to the towers and the fiber? I think that stays with you, but I just wanted to make sure I understood what was the logistics.

That’s correct, Ric. That the towers, we have just shy of 200 owned towers and the fibers Dave mentioned, that remains with Shentel. That's not part of the affiliation agreement.

Okay. And do you guys already charge market rates between the Wireless business and tower business on the intercompany billing?

Yes, we do, we do.

Okay. And then on the competitive dynamics, I mean, Dave, you called out a little bit about the churn impact from the new Sprint rate card. But as we think of competitive dynamics in your marketplace, help us understand where you see the trends heading on gross adds, churn into ARPU, kind of how those all interplay?

Sure, Ric,, I will give more inside. The third quarter I think was evidence that we continue to out punch our weight class in our geography. We're not seeing, Ric, really anything substantially different than prior quarters on the competitive front. We continue to have good success against U.S. Southern in particularly, where we overlap their footprint, but no major competitive changes. With respect to the Sprint rate card changes, some of the dynamic we're seeing that's impacting churn somewhat is line 3, 4, and 5, no longer being free is causing some line level churn not necessarily account level churn but line level churn, and we're seeing a little bit of churn impact as a result of some of the Sprint promotional pricing rolling off as well. But again, we're cautiously optimistic on the ARPU front that the stabilization we've seen here over the last couple of quarters will have some sustaining power.

Okay. And Sprint saw a little bit of an uptick in their ARPU. Is it possible you guys could see ARPU trend up a little bit, too, instead of just stable?

It’s always possible, Ric. We'll remain cautiously optimistic.

And there you go. Last one from me is on the Wireless margins. Including the management fee waiver, it looks like your Wireless margins were kind of in the mid-50s. After the management fee waiver, kind of maybe mid-40s. Where do you see that headed as you get further scale into the nTelos territories and the new tariff expansion territories? Where could head on a consolidated basis?

Well, Ric, I think – I'll let Jim chime in with his thoughts here as well here. But I think the recent performance you have seen from a margin expansion perspective in the Wireless business is evidence of the fact that we've been largely able to hold costs flat while revenue has grown. And with respect to our expansion, we continue to build fiber wherever we can. In fact, we're going to build fiber to over 100 towers this year incrementally. And that does a couple of things for us, it helps grow our fiber footprint and create sales opportunities in the commercial and wholesale space, but it also drives cost out on above-market rates that we're paying primarily related to the nTelos acquisition. So we're pretty proud of the results we've had. In terms of where the results are going, I'll hand that to Jim.

Yes, so, Ric, I think the best way to think about that is that, over time, we expect them to remain where they are or grow that, but that could be lumpy because as we've talked about, we like the towers up, right? And then we unleash what is proving to be a pretty robust and effective marketing arm and sales arm, and we spend a lot of time thinking about the timing of those two things, so there's not a lag there. So the opportunity for us is in these expansion territories where the penetration is very low when we acquired it. As we build it out, it goes – just doing nothing heroic, we're getting that penetration up to what we're at now like 18% or so. I think that gives us a lot of potential upside. And the other part of that is, is that dependent – and obviously, of course, it's dependent on the pricing and the promotions and whatnot from Sprint. But if Sprint letting the promotional – promotions lapse, if that does, we start to see some of the same things that Sprint saw. I think that's, again, more margin expansion.

Okay, thanks guys.

Thank you. And our next question comes from Amy Yong with Macquarie. Your line is now open.

This is Rachel for Amy. Two quick questions. So you've talked more broadly about the competitive landscape, but could you talk about prepaid competition? The landscape seems to be shifting with T focused on prepaid mobile, rebranding Metro. So we're just wondering if there's any impact to your business there. And then secondly, in the transition of Voice Over IP, have you quantified how much in cost savings you expect to see?

Amy, this is Dave. First on the prepaid competition front, the more recent rebranding of T-Mobile's prepaid offering is not something we've seen any material impact from as of yet. And I'd say to the contrary with our continued growth in the prepaid business, we feel really good about our investments in the Boost brand. And we think that, in general, consumers have a pretty positive reaction to Boost's overall marketing position and we're very pleased with the performance of the new retail store footprint there, and we're not really seeing anything from AT&T or T-Mobile that has changed in recent months. In terms of the VoIP margin benefit, it's in the range of $2 million to $3 million annualized.

Thank you.

Thank you. And our next question comes from Hamed Khorsand with BWS Financial. Your line is now open.

Could you talk about the cost savings you had on these switches moving to VoIP facilities? Was this the remnants from nTelos or was this the CapEx program for the entire company?

Good morning, Hamed. Now, that was related to some Sprint architecture changes, it's company-wide, system-wide, not nTelos related. And I think I just previously disclosed to Amy, it's in the range of $2 million to $3 million annualized in terms of the savings.

Okay, all right, and then as far as the new promotions are going on right now with the new iPhone releases, does that hurt you at all as far as what customers are looking for with the subscription plans?

Does it hurt us at all? Well, we – the response to the new iPhone I think industry-wide, as you probably observed, has been fairly muted. And its been the case for us as well. So we're not seeing any kind of material financial deterioration as a result of the new Sprint promotional activity related to the iPhone.

Okay, all right, great. Thank you.

Thank you. [Operator Instructions] And our next question comes from Zach Silver with B. Riley FBR. Your line is now open.

Okay, great. Thanks for taking the question. First on the expansion territories, I think you guys have had Parkersburg for a little bit over a year now. And presumably, you've begun kind of selling into that. I just was curious on whether Parkersburg was a meaningful contributor to gross adds? And then, also, if you could give us an update on when you expect to start selling into Richmond, when that network build-out is going to be complete?

Sure, Zach. This is Dave. Parkersburg in terms of a meaningful contribution to gross activations, I wouldn't characterize it as meaningful. The majority of the capital investment in the Wireless business this year is to wrap up the investments in the acquired nTelos territories. So we're seeing more contribution from legacy nTelos markets than Parkersburg. And with respect to the Richmond sliver, we really haven't begun in earnest our upgrade program in the acquired Richmond geography, and so that's more of a 2019 and 2020 opportunity for us than it is a 2018 opportunity.

Okay, that’s helpful. And then if I could just ask one more. I think Sprint was counting digital sales channels on their recent call, and I was just wondering if you've seen meaningful portion of gross adds coming in through digital sales channels? And if that maybe makes you kind of rethink your sort of longer-term putting more – if there's an opportunity to maybe put less physical stores in over the next couple of years?

Yeah, I noted those comments as well on their earnings release, Zach. Interpret this how you will, but they, I think, quoted 60% digital sales growth versus prior year and that number for us was 56%. So we're kind of neck and neck with Sprint as is already the case. And of course, we see some benefit from Sprint’s investments in that platform as you might expect in our geography as well. Does it make us rethink our approach to retail? I don't know that I would go that far. We have a pretty – I don't know, I would say a pretty well-established rinse, wash, repeat program associated with retail expansion that's become pretty predictable for us that we enjoyed there, but it's something we're going to continue to keep a close eye on.

All right, great. Thank you very much.

Thank you. And we do have a follow up with Ric Prentiss with Raymond James. Your line is now open.

Hey, guys. Two quick follow-up questions. CapEx, obviously, came in a little bit lower than previous. You called out some equipment deliveries. Can you help us understand what's going on there a little bit? And then longer term on CapEx, what are your thoughts about 5G spending, particularly as you heard what Sprint's plans might be?

Yeah, Ric, there is not really any meaningful story on CapEx relative to what was budgeted. I think the primary drivers, as noted in the scripted comments this morning, were really better Wireless equipment pricing. And as you can expect with the vast majority of our capital going into the wireless business, equipment pricing benefits that weren't budgeted or expected were meaningful. We had budgeted some fiber RUs, we ended up not needing, which was several million dollars and other just kind of cats and dogs related to timing, but there's no major headline there, so to speak. In terms of our go-forward plans relative to 5G, I think the company has previously disclosed and I would reiterate that the 5G opportunity for us, as well as the threat, is relatively muted just given the geography that we cover and in particular, the fact that Sprint leverages the 2.5 spectrum band for most of their LTE advanced deployments and the 5G opportunity that they see. And that's a relatively small portion of our macro network, it's 23% versus 70% for Sprint in the more urban areas. So you shouldn't expect to see a big increase in CapEx related to 5G for us.

Okay. And there's a spectrum lease agreement between Sprint and T-Mobile announced recently. Are you familiar with that, the agreement? Obviously, it's outside of the auspices of the transaction, but will that have any impact on your ability for spectrum?

Yes, we're aware. And no, we don't believe it will impact our spectrum strategy.

Okay, great. Thanks guys. I appreciate the follow up.

Thank you. And that does concludes today’s question-and-answer session.

Thank you everyone for joining us today and we look forward to updating you and keeping you updated on our continued progress. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect and everyone have a great day.