Good morning, everyone. Welcome to Shenandoah Telecommunications third quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Nesbett of IMS and Investor Relations for Shentel.

Good morning and thank you for joining us. The purpose of today's call is to review Shentel's results for the third quarter 2020. Our results were announced in a press release distributed this morning and the presentation we'll be reviewing is included on our investor page of our website www.shentel.com. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call are Chris French, President and Chief Executive Officer; Dave Heimbach, Executive Vice President and Chief Operating Officer; and Jim Volk, Senior Vice President, Finance and CFO. After our prepared remarks, we will conduct a question-and-answer session. As always, let me refer you to Slide 2 of the presentation, which contains our safe harbor disclaimer to remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. These may cause our actual results to differ materially from the statements. Hence, I'll provide a detailed discussion of various risk factors in our SEC filings, which you're 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 statements. With that, I'll turn the call over to Chris now. Go ahead, Chris.

Thanks, John. We appreciate everyone joining us this morning, and I hope everyone is healthy and safe. As reflected on Slide 4, we had another strong quarter of broadband results with 6,000 net high-speed data additions, driven in part by record Glo Fiber net adds of approximately 1,500. Together, our income in cable and Glo Fiber year-over-year organic subscriber growth rates outpaced our public company peers and with the strong sales in fiber construction momentum we have achieved, we're excited for the future growth of our broadband business. Dave will provide more detail on these outstanding results later on the call. Turning to Slide 5, highlighting our commitment to shareholder returns, we announced last week a 17% increase in our annual cash dividend to $0.34 per share, consistent with the growth of earnings per share driven by strong results from our wireless business. The dividend marks the eighth consecutive year of an annual increase and is also our 61st consecutive year of dividend payments. Moving to Slide 6, I'd like to transition now to the strategic direction we're taking following T-Mobile's exercise of their purchase option of our wireless business. Over our long history, Shentel has continued to evolve by investing in the latest technologies to meet the growing demand for telecommunication services in the rural markets that we serve. While we have mixed emotions about divesting our Sprint affiliate business, the transaction will allow us to fully focus our resources on our transition to a regional integrated broadband communications company. Our new Glo Fiber and Beam fixed wireless broadband initiatives are the latest highlights in a decade-long strategy that began with the acquisition of several rural incumbent cable properties and an aggressive middle-mile fiber expansion in our region. We're very pleased with our first year of Glo Fiber results…

Thank you, Chris, and good morning everyone. Before reviewing our financial results for the third quarter, let me walk you through the accounting changes we made regarding the pending sale of our wireless segment. Please refer to Slide 9. As the T-Mobile exercised their option to purchase our wireless assets and operations on August 26, we concluded that the sale would be consummated within one year, and therefore, our wireless assets and liabilities are presented as held for sale in our consolidated balance sheet and the wireless net income is now presented as discontinued operations in our consolidated statement of comprehensive income. On a similar note, the Wireless cash flows have been separated and shown as, operating, investing, and financing cash flows from discontinuing operations in our consolidated statement of cash flows. Prior period results and balances have been retrospectively revised and presented as discontinued operations and assets held for sale for comparability. We have ceased depreciating and amortizing the assets held for sale prospectively starting in September. In addition, certain intercompany expenses have been reallocated between segments to conform with the accounting standards on discontinued operations, and an income tax provision has been applied separately to continuing and discontinuing operations. Lastly, our outstanding term loans have been reclassified as a current liability in our consolidated balance sheet. Although not a Wireless segment liability that will be transferred, there is a mandatory prepayment requirement in our credit agreement upon the sale of wireless. Interest expense related to the term loans is included in net income from discontinued operations and repayments of our term loans is presented as cash used in financing activities from discontinued operations. Please refer to footnote 2 in the 10-Q we filed this morning for more details on the accounting changes regarding our wireless segment. In addition…

Thanks, Jim, and good morning everyone. I'll begin on Slide 15 with our incumbent cable business in which total RGUs grew a robust 7.8% year-over-year in the third quarter to approximately 181,500, compared to roughly 168,400 in the same period in the prior year. As Chris pointed out at the start of the call, we added roughly 4,500 net broadband data RGUs in the quarter and ended the quarter with 96,000 data RGUs, which is an impressive 16.4% increase to the prior-year period. We're also very pleased to report that our incumbent cable broadband data penetration increased from 40% in the third quarter last year to 46.2% this quarter, on the continued strength of our new broadband speeds, rate cards, service improvements and increased demand related to COVID-19. Incumbent cable broadband data churn declined 9 basis points to 1.88% in the third quarter, representing the 14th consecutive quarter of year-over-year churn improvement. Excluding the impact of deferred non-paid disconnects from the second quarter, third-quarter data churn in our incumbent cable business would have been 1.73% in those markets. Broadband data average revenue per user increased slightly versus the prior year to $77.66 as our new powerhouse branded rate card leveraging an improved value proposition based on our DOCSIS 3.1 speed upgrades now comprises 70% of the base. At the end of the third quarter 2019, 37% of incumbent cable data customers were on rate plans of 10 megabits per second or less, and now 75% are on plans of 25 megabits per second or greater with an average subscribed download speed of 79 megabits per second, which is well beyond the reach of our DSL competitors. Turning to Slide 16. We continue to gain momentum with our new Fiber to the Home Edge Out strategy, Glo Fiber. Glo had approximately…

[Operator Instructions]. Your first question comes from the line of Ric Prentiss with Raymond James.

Thanks, good morning guys. Glad to hear you're doing okay during these crazy times. A couple of questions, first on the wireless process. So have all 3 of the appraisers been selected to get started on their work?

Ric, that's going to happen here before the month is out.

Okay. And with the framework in place, what's the expectation on how they'll be able to do that work? Is it just kind of cash flow, comps? What is the expectation of how they'll perform that appraisal process?

Likely, it's a combination of factors, Ric. DCF would be among them, precedent transactions, comps, etc. But we don't want to comment too much and how we're applying too much on how we think they ought to conduct the process, obviously, because we don't want to taint the process. Likely it's a combination of factors.

And how would the expansion territories you addressed in that, I know it's assuming that the T-Mobile, Sprint deal had not happened. So is there a thought that the expansion territories have to be addressed in that valuation?

Yes. That's right. Jim, do you want to take that one?

Yes. Ric, so we expect the appraisers will want to look at our 10-year plan and growth that we're expecting from the expansion markets, which as you know are a big part of our growth strategy going forward. So they will be factored in from a DCF perspective in that respect, and there is also a mechanism within in the affiliate agreement in the framework that if for some reason the appraised value for the expansion markets was of the multiple for the expansion market on EBITDA is less than book value, they would bump the value for the expansion markets up to the net book value as of the valuation date. So there is the mechanism was intended to make sure that we don't lose our investments that we've been making since we acquired these markets.

Makes sense. And Chris, you had mentioned, you look at the proceeds, obviously, you have to repay the term loan and then income taxes. Any indication of what kind of taxes might be borne or what the basis is on the wireless business?

Not that we've publicly said yet. I don't know Jim, if you want to add any other color. We have not disclosed the cost basis on those assets.

Yes. Ric, as Chris said, we have not disclosed the basis, but we will. Once the value is determined, it looks like it's going to be the second half of January. We will disclose not only value but what we think the after tax proceeds would be and what the tax impact will be.

Makes sense. I think Chris you also mentioned guidance and financing and corporate costs, obviously, that would be one of the areas that you have to look at. What's the thought as far as time frames as far as looking at the corporate costs? How do you right-size the organization? How should we think about that timing and rough magnitude of what the dollar level might be?

Yes. We're obviously looking at that now and time frame will be about the same as once we get clarity on the proceeds from the sale and the tax effect and all that. So should be the first or second quarter of next year.

Then as we think about the tower business, how critical is that to keep with the broadband business? We've seen some transactions even just this week, American Tower paid 30.4x tower cash flow for a private tower company. So how should we think about the tower business? Is it something you want to keep, you need to keep? Or is it something that might get monetized as well?

Yes. Go ahead, Jim.

I would say we'll take it one step at a time here. Wireless is in the batter's box right now and then we'll determine what do a towers down the road. I don't think it's strategic to us, as I think we've said in the past but the towers can be a valuable source of funding if we're doing an acquisition and we wanted to monetize them to help us fund an acquisition. So we're thinking about it in those lines.

And last one just to pick up on that comment. Are there any transactions out there that in the Telco, Cable broadband space? How is that market looking at pipeline for potential acquisitions?

Ric, we continue to look for opportunities both, kind of, a small tuck-in opportunities like Big Sandy that we completed last year, and there's a couple of those that we're competing on as we speak today, and we're also looking at more transformative opportunities as well. They don't come along as frequently, but we're poised to be opportunistic is as they do. data.

Your next question comes from the line of Zack Silver with B. Riley.

The first one, just following up on some of Rick's questions around the appraisal process. In the towers deal, I think Sprint agreed to waive around $250 million of cash payments for management fees. Is that something that is factored into the appraisal framework?

Zack, it actually won't be a part of the appraisal framework, as it much it will be like a working capital purchase price adjustment once the value is determined. It will be added to the ultimate value, but it will be done not be added after the fact, not as part of the appraisal process.

That makes sense. Then, you flagged that the term loans require repayment upon closing of the wireless sale. When you think about how the new Shentel looks, how are you thinking about capitalizing that business from a leverage perspective?

Zack, we're still putting pen to paper on that. But I would say in general, you probably can expect leverage similar to the leverage that we have today -- in the same range that we have today. We will be growing the business, the broadband business aggressively as Dave and Chris had outlined on the call. So we will put something in place that will allow us to make sure we have adequate funds to keep funding that business and keep growing the business.

Got it. Then, at a more high level, it seems like that alongside COVID accelerating demand for high-speed broadband and the relative attractiveness of this business, there's been a lot of investment from incumbent players and also new entrants, and you guys sort of have a hybrid approach there. How do you see the competitive environment evolving in your markets? And what gives you the confidence that you can compete with some of the larger incumbents or others pursuing fixed wireless technology in those markets?

Zack, look, we have a, I think, track record over the course of the last year that hopefully gives you confidence in our ability to do that with the investments we've made and the results we're achieving. We're a well-known company in our region and the urban markets get real rural quickly here in this part of the country. And so I think having a multi-pronged broadband strategy here leveraging 3 distinct technologies is the absolute best way to go. We have been -- as I think you would observe, we've been aggressive in acquiring protected spectrum assets in our region, and you've probably noticed the overlap of the 3.5 we acquired with our incumbent cable markets as well. So we have both an offensive and defensive strategy with our three-pronged strategy here. And I'm quite confident in our ability to take market share and defend our existing market share in the near future.

Got it. And then, last one for me, the incumbent, the broadband penetration for the incumbent cable business, I mean, I think expanded at one of the better rates that we've seen this quarter. Can you talk about where the new subs are coming from? Is it folks upgrading from DSL? Is it broadband levers? And just what were those new additions coming from?

Yes. I think it's both of those categories in addition to folks that perhaps were leveraging their cellular data plan and trying to tether off of that. Obviously, we're capitalizing on the tailwinds of the pandemic and work and study from home. But our investments in both our network, and our new rate card, and our operations all came at an outstanding time quite frankly. So I think we're executing better. I think we've got a better price-value equation now than we did before. I think you see that as evidenced in 14 consecutive quarters of churn reduction. Our NPS scores are through the roof, and not so long ago they were pretty poor. So I think if you consider the operational momentum that we have in addition to the tailwind of the demand factors of COVID, I think they've all come together quite nicely here to produce those results. But in terms of where the share is coming from, it's dealing it from our DSL competitors, it's taking it from folks that were tethering to cellular plans, may have been using satellite previously, and last but not least, to your point, there is probably some broadband levers that have added service. We didn't make a comment about this in the script, Zack. But the other aspect of the growth is, we added 700 net prepaid subs in the quarter. That's part of that overall number, and that's to deal with our more credit-challenged subscriber base, and we added a rate plan in the midst of COVID, that we've allowed to persist here through the year. And we're in the midst of revamping overall prepaid strategy and expect to see good growth through those investments as well.

[Operator Instructions] Your next question comes from the line of Hamed Khorsand with BWS Financial.

Just building on that competition theme. Have you guys done any analysis on what your expectations as far as the cost of acquisition beyond just the cost per passing?

Yes, of course. Good morning, Hamed. For which category are you questioning? All 3, or...

Really just the Glo Fiber and the Beam.

Yeah. So the cost to connect the Glo Fiber customer is in the $800-$900 range, Hamed, all-in. And on Beam, it's roughly half of that.

What's usually the enticement to get a customer switch over? Is it just that you're faster?

We're faster. We've got a much more straightforward go-to-market strategy with respect to our value proposition. We've got 3 speed choices. We're not playing games or gimmicks on introductory prices that raise after expiration. People recognize that this offering is coming from a regional company and generally around here, folks like to spend their dollars with companies that reinvest in their communities. And candidly, there is just Comcast [indiscernible]. Folks are very pleased to have a choice. All of these markets are non-Fios Verizon markets, the far that we've launched in. And so their option is really if they want to a robust high-speed broadband product, it's either us or Comcast.

Okay. does having multiple options, what are the chances here just expanding your coverage region beyond what we're used to?

Well, I think with our Glo strategy, we've clearly demonstrated a track record here of adding new markets every quarter, and we'll continue to do that. And if you take a look at the map and you just look at where we started and where we are now, you're seeing us edge out further and further beyond home base, so to speak. So I think there is a strong likelihood that when you look at the combination of the spectrum footprint on that map in the presentation and you look at the markets that we've added for Glo, I think you can expect for us to continue to grow the footprint. Having said that, we're very conscious of taking advantage of operating leverage and operating synergies, and we don't want to pickup and plonked down 5 states away with a greenfield build that probably would not be something you should expect us to do. But edging out from the home base in the center of our universe is something we're very focused on.

Your next question comes from the line of Kent Newcomb with Wells Fargo.

My question is on the dividend. You recently raised it quite a bit. I guess I'm under the assumption that you expect to maintain that dividend after the sale of wireless. And I guess, the question would be, are the cash flows sufficient to do that and continue your investment build-out or perhaps you're obviously going to use proceeds from the sale to invest as well?

Kent, we have a long history of having an annual dividend. We will probably right size that according to the broadband and tower businesses that we'll own at this time next year, so it will likely adjust, according to the cash flows and in the earnings coming from those businesses. But yes, we think we're in a strong liquidity and cash generation prospect here year that we can do both. We could return value to the shareholders, and we can continue to invest in our new Glo Fiber and Beam products.

You have a follow-up question from the line of Ric Prentiss with Raymond James.

I find Slide 19 really interesting I think it lays it out quite well. Couple of questions related there. What kind of speeds will you be offering the Beam customers?

Ric, it's -- our initial rate plan is entry at 25 megabits download and then up to 100 megabits download, depending on where you are with respect to the tower, and what our signal propagation characteristics look like. Over time, we expect to offer higher speeds when CPE advancements continue to develop here, but out of the gates we're offering 3 tiers 25,50 and 100.

Okay. Great. And then as you think about what markets get Glo Fiber versus what get Beam, is there a breakpoint where fiber density as far as population per square mile says has enough time to go Beam versus fiber? And what would that breakpoint basically be?

Yes. Look, there is a combination of factors here that we evaluate. Certainly, density and route, whether it's route mile or square mile, density is one of them. Another factor we look at is just what with the competitive landscape looks like. So for instance, we are not targeting cable areas. In other words, folks that have a choice from a Comcast or a Cox or someone with our fixed wireless strategy. We're targeting areas that only would have maybe DSL or satellite or a local unlicensed spectrum wireless ISP as their most viable broadband choice. So it's a function of density, it's a function of competition, and it's also a function of other socioeconomic factors and poverty rates and all kinds of other factors as we look at the level of investment. As you can appreciate in that slide, it's a much greater upfront investment deploying fiber than it is deploying, the point being, which is a much more capital efficient technology. So we want to have a little greater certainty on the Glo Fiber side of achieving our penetration rate objectives as a result.

Right. Because I think the addressable market that's laid out is that there is a much larger addressable market for the Beam side than the Glo side at least right now.

Yes. That's right. And the other factor, Ric, that we consider candidly is in these franchise permits we're getting, those are for our ability to offer video service. Obviously, there is going to be a point in time, in the not-too-distant future, we're not entirely certain when that is, you're probably not either. But we all have a pretty good inclination that we're heading to a streaming-only universe. But, to date, we have not wanted to put ourselves in a position where we didn't have a viable video product in the bundle, particularly when competing with Comcast. But I imagine there will be a point in time, at which data only would be a viable strategy and that we could achieve the kinds of penetration rates and churn rates and broadband data ARPUs that would support the kind of IRRs we expect to get with a 3 product bundle strategy and to that extent, it would enable us to get out of some of these more urban centers and into suburban areas that might be out in the county, which to date, we've been reluctant to do because that would obligate us to a build strategy for the video franchise for the whole county, which we obviously don't want to obligate ourselves to doing given the density characteristics. So I think you can expect this to change over time as the market evolves.

Obviously, T-Mobile has launched the T-Vision product which is content related for streaming but also to be a pull for fixed wireless broadband. Do you see entering kind of that content side of the business or offering content bundles to try and push the penetration rates or you don't even need it given the competition level that you're going against?

For the fixed wireless strategy, we don't have any plans right now to offer a bundled video offering of any kind. That could change over time, but we don't have any plans at present.

It appears there are no additional questions. I would now like to turn the conference back to Jim Volk, for closing remarks.

I would like to thank everyone for joining our call this morning, and we will keep you posted as we make progress both on the wireless side with the appraisal process and of course, with our broadband and tower businesses. Thank you for joining the call today. Have a good day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.