Shenandoah Telecommunications Company — Q2 2015 Form 10-Q
Business and period. The unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Shentel provides wireless service as a Sprint PCS affiliate, cable video/internet/voice services, and wireline, fiber and related services.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $85.7 | $81.4 | $170.0 | $161.9 |
| Operating income | $18.8 | $15.8 | $37.3 | $31.5 |
| Net income | $10.5 | $8.6 | $20.8 | $17.2 |
| Diluted EPS | $0.43 | $0.35 | $0.85 | $0.71 |
| Operating margin | 21.9% | 19.4% | 21.9% | 19.4% |
| Adjusted OIBDA (non-GAAP) | $37.2 | $33.0 | $72.9 | $64.7 |
- Q2 revenue grew 5.3% and net income 21.6% year over year; first-half revenue grew 5.0% and net income 20.5%. Operating income rose faster than revenue as lower costs, particularly postpaid handset costs, outweighed higher SG&A and depreciation.
- Q2 Cable revenue increased 15.9%, but the segment remained loss-making, with a $0.4 million operating loss versus a $2.1 million loss a year earlier. Wireless operating income rose 9.7% in Q2; Wireline operating income rose 5.5%.
- First-half operating cash flow was $60.3 million, down from $66.6 million. Capital expenditures were $25.1 million, versus $32.8 million; cash increased to $92.1 million from $68.9 million at year-end 2014.
- At June 30, total debt was $212.8 million, including $23.0 million current maturities; cash less total debt was approximately $120.7 million net debt. The company reported compliance with its debt covenants. Current assets were $134.4 million and current liabilities $55.7 million.
Changes, outlook and risks
- Revenue drivers: Cable growth reflected more internet and voice subscribers, higher-speed internet plans and video rate increases. Wireless benefited from prepaid growth; postpaid service revenue was pressured by lower-priced plans associated with handset financing. Wireline benefited from fiber contracts and internet upgrades.
- Cost and subscriber considerations: Postpaid handset costs fell as Sprint assumed handset costs under financing/leasing plans, while cable programming costs, SG&A and network depreciation increased. Cable video customers declined year over year while internet customers increased. Q2 prepaid wireless net additions were negative, and prepaid monthly churn increased to 5.07% from 3.78%.
- Outlook: Management budgeted 2015 capital expenditures of $74.8 million and expected the effective tax rate for the remainder of 2015 to be approximately 40%, absent unanticipated adjustments. Management said cash, operating cash flow and expected credit-facility availability should fund planned spending and obligations for at least the next 12 months. No full-year revenue or earnings guidance is provided in the filing text.
- Debt and interest-rate exposure: Debt bears a variable rate; an interest-rate swap covered about 76% of outstanding variable-rate debt. The company estimated a 1 percentage-point rate increase would add about $2.0 million to annual interest expense before the swap effect; the swap was adding approximately $1.2 million annually at prevailing rates. The filing identifies $51.2 million of variable-rate debt without protection.
- Business and reporting risks: Sprint performs key wireless functions and remits approximately 57% of company operating revenue; Shentel relies on Sprint for timely, accurate revenue and receivables information. Management cited risks including competition, changing demand and technology, regulation, financing needs, and dependence on Sprint and on attracting and retaining customers. No material changes to the previously disclosed risk factors were reported. Disclosure controls were deemed effective; no material internal-control changes were reported.
Investor verification priorities
- Review whether growth in cable internet and voice customers can offset declining video customers and rising programming costs, and whether Cable can reach operating profitability.
- Track wireless prepaid churn and net additions, and assess how Sprint handset financing affects reported service revenue, costs and customer economics.
- Compare actual 2015 capital spending with the $74.8 million budget and monitor operating cash flow, debt repayments and liquidity.
- Verify debt covenant headroom and the effect of interest-rate changes, including the swap’s coverage, costs and scheduled debt amortization.
- Assess reliance on Sprint for a substantial share of revenue and for operational and financial data, and monitor any changes in that relationship.