Business Context and Reporting Period
Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: A diversified telecommunications provider operating in Virginia, West Virginia, Maryland, and Pennsylvania. Key segments include Wireless (PCS affiliate of Sprint Nextel), Telephone, Mobile (tower leasing), Cable TV, and Other services. The company announced the sale of its "Converged Services" operation, which is now classified as held for sale and reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Operating Revenues | $37,409 | $107,304 |
| Operating Income | $12,599 | $35,881 |
| Net Income (Continuing Ops) | $7,444 | $20,977 |
| Net Income (Total) | $6,808 | $18,849 |
| Diluted EPS (Total) | $0.29 | $0.80 |
| Cash from Operations (9mo) | $31,212 | |
| Capital Expenditures (9mo) | ($38,900) | |
| Total Debt (Sep 30, 2008) | $18,735 (Current: $4,360; Long-term: $14,375) | |
| Cash and Equivalents | $7,318 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 14.6% ($4.8M) for the quarter and 12.1% ($11.5M) for the nine months compared to 2007. This was primarily driven by a 15.5% increase in PCS retail subscribers (205,777 vs. 178,077).
- Profitability: Net income from continuing operations rose 22.6% for the quarter and 18.4% for the nine months. The nine-month improvement was aided by the absence of one-time costs incurred in 2007 related to early retirements and severances.
- Discontinued Operations: The Converged Services segment is now classified as held for sale. It generated a loss of $2.1M for the nine months ended September 30, 2008, compared to a loss of $2.6M in the prior year period.
- Investment Losses: Other income/expense decreased due to losses on investments in partnerships and unrealized losses on marketable investments held in a rabbi trust, contrasting with gains in the prior year.
- Capital Spending: Capital expenditures surged to $38.9M for the nine months (vs. $18.1M in 2007), driven by accelerated PCS network expansion (60 new base stations planned) and EVDO upgrades.
Guidance, Outlook, and Risks
- Capital Plan: The 2008 capital budget was increased to approximately $74M. Significant spending is allocated to PCS network expansion and the acquisition of cable assets from Rapid Communications (estimated $10M purchase price).
- Financing: On October 22, 2008, the company secured a $52M Delayed Draw Term Loan to fund the Rapid Communications acquisition and network upgrades. The company expects to draw on this facility through December 31, 2009.
- Dividends: A cash dividend of $0.30 per share was declared on October 20, 2008, payable December 1, 2008.
- Risks:
- Sprint Nextel Dependency: The PCS segment relies heavily on Sprint Nextel for billing, collections, and customer care. Approximately 60% of total operating revenues are remitted by Sprint.
- Regulatory/Legal: Potential risks regarding the enforceability of early termination fees due to class action suits against Sprint Nextel and FCC proceedings.
- Market Risk: Exposure to interest rate fluctuations on future borrowings under the new term loan facility.
Investor Verification Checklist
- PCS Subscriber Quality: Verify the sustainability of the 15.5% subscriber growth and the impact of the terminated agent relationship on future gross adds.
- Converged Services Sale: Monitor the timeline and final terms of the sale of the Converged Services unit currently held for sale.
- Rapid Communications Acquisition: Confirm the closing of the $10M acquisition and the integration of the 17,200 new cable customers.
- Capital Expenditure Execution: Track the deployment of the $74M capital budget, specifically the rollout of EVDO sites and new PCS base stations.
- Sprint Nextel Relationship: Assess any changes in the management agreement or revenue sharing terms with Sprint Nextel.