SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2002
Business Overview: The Company provides telephone, long-distance, PCS, cellular, cable TV, internet, and fiber optic network services, primarily along the Interstate 81 corridor in Virginia, West Virginia, Maryland, and Pennsylvania. The business strategy has shifted from traditional wireline to wireless revenues, with a focus on expanding the Sprint PCS network using CDMA technology.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 44.9% year-over-year, driven primarily by a 68.7% increase in wireless revenue ($16.9M vs $10.0M). Wireless now accounts for 65.4% of total revenue compared to 56.2% in 2001.
• Subscriber Growth: Digital PCS subscribers grew to 58,120 (up 30,781 from Q1 2001), while analog cellular subscribers declined to 9,246.
• Profitability: Net income surged 341% to $2.2 million. Operating margin improved to 25.2% due to higher wireless revenues covering fixed costs.
• Investment Losses: Loss on investments improved by $0.7 million compared to Q1 2001, though the Company recognized a $0.4 million loss on the sale of VeriSign shares in Q1 2002.
• Expense Increases: Operating expenses rose 38.8% to $19.3 million, largely due to network expansion, handset subsidies, and increased selling/administrative costs supporting subscriber growth.

Outlook, Risks, and Management Commentary

• Network Expansion: The Company completed the initial build-out of the Altoona, PA market and is transitioning focus to service improvement. It is currently installing 3G 1x technology upgrades at an estimated cost of $3 million.
• Travel Revenue Risk: The Company is dependent on Sprint PCS for travel revenue reporting. Rates for travel and long-distance minutes were reduced effective January 1, 2002. While the Company was net receivable by $1.2 million in Q1, future net positions are uncertain.
• Investment Impairment Risk: The Company holds a significant investment in VeriSign, Inc. (260,158 shares). The stock price dropped from a carrying value of $38.04/share to $8.07/share by late April 2002. Management warns that if the price remains depressed through Q2 2002, a significant impairment charge (approx. $7.8 million pre-tax) may be recognized.
• Liquidity and Debt: The Company has a $35.0 million revolver with CoBank maturing June 1, 2002, and a $2.0 million local bank line maturing May 31, 2002. Both are being negotiated for renewal. Capital spending for 2002 is budgeted at approximately $30.3 million.
• Accounting Changes: The Company adopted SFAS No. 142 (Goodwill) and SFAS No. 144 (Impairment) effective January 1, 2002, eliminating goodwill amortization expense.

Investor Verification Checklist

• VeriSign Impairment: Monitor the VeriSign stock price through Q2 2002 to assess the likelihood of a ~$7.8 million impairment charge.
• Debt Renewal: Confirm the successful renewal of the $35.0 million CoBank revolver and the $2.0 million local bank line before their June and May 2002 maturities.
• Travel Revenue Trends: Verify the net receivable position regarding Sprint PCS travel rates, as rate reductions and usage trends directly impact wireless margins.
• Capital Budget Adherence: Track capital expenditures against the $30.3 million 2002 budget, particularly regarding 3G network upgrades.
• Subscriber Churn: Review PCS churn rates (2.58% in Q1 2002) to ensure growth sustainability in the competitive wireless market.