SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008
Business Overview: A diversified telecommunications provider operating six segments: PCS (Sprint Nextel affiliate), Telephone, Converged Services (MDU housing), Mobile (tower leasing), Cable TV, and Other. The company operates primarily in Virginia, West Virginia, Maryland, and Pennsylvania.

Key Financial Metrics

Note: Total Debt calculated as Current maturities ($4,322) + Long-term debt ($15,479). Operating margins for the six months ended June 30, 2008, were approximately 27.6%.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 11.5% ($4.0M) for the quarter and 11.0% ($7.5M) for the six months compared to 2007. This was primarily driven by a 15.8% increase in PCS retail subscribers (200,397 vs. 172,983).
• Profitability: Net income rose 21.9% ($1.3M) for the quarter and 20.2% ($2.0M) for the six months. Improvements were driven by the PCS segment and the absence of one-time costs incurred in 2007 related to early retirements and severances.
• Expense Trends: Operating expenses increased 5.6% (quarter) and 6.7% (six months). Increases were due to PCS network expansion (18 new sites, 93 EVDO upgrades) and customer retention initiatives. The 2007 period included $1.0M in non-recurring expenses not present in 2008.
• Segment Performance:
  • PCS: Operating income increased 32.1% (quarter) and 7.5% (six months).
  • Telephone: Operating income decreased 17.8% (quarter) but increased 12.1% (six months) due to the absence of 2007 severance costs.
  • Converged Services: Remained unprofitable but reduced losses by 16.0% (quarter) and 10.5% (six months).

Outlook, Risks, and Unusual Items

• Capital Expenditures: The 2008 capital budget was increased by $9M to approximately $74M. This includes $46.9M for 60 additional PCS base stations and 150 new EVDO sites to support Sprint Nextel's Q-chat technology and data speeds. The company spent $18.7M in the first six months of 2008.
• Acquisition: On August 6, 2008, the company entered an agreement to acquire cable assets from Rapid Communications, LLC for $16.1M, adding approximately 17,650 customers. Financing is expected via a line of credit.
• Liquidity: The company has $23.0M in cash and $10.7M available under a revolving credit facility. Management is discussing increasing credit facility availability by $20M-$25M to fund capital spending.
• Risks:
  • Sprint Nextel Dependency: The PCS segment relies on Sprint Nextel for billing, collections, and customer care. Approximately 60% of total operating revenues are remitted by Sprint.
  • Regulatory/Legal: Potential challenges to early termination fees (ETFs) following a California court ruling against Sprint Nextel. FCC proceedings regarding state regulation of ETFs are ongoing.
  • Market Risk: Interest rate risk is limited as all outstanding debt is fixed-rate. However, investments in early-stage private companies ($7.3M) are subject to market volatility.

Investor Verification Checklist

• PCS Subscriber Quality: Verify the sustainability of the 15.8% subscriber growth and the impact of the terminated agent relationship on future gross adds.
• Capital Spend Execution: Monitor the execution of the $74M capital budget, specifically the rollout of 150 EVDO sites and 60 new base stations.
• Acquisition Integration: Track the closing and integration of the Rapid Communications cable asset acquisition ($16.1M).
• Regulatory Exposure: Assess the potential financial impact of FCC rulings or state laws regarding Early Termination Fees on the PCS segment.
• Converged Services Turnaround: Evaluate the path to profitability for the Converged Services segment, which continues to report operating losses.