Business Context and Reporting Period
Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: A diversified telecommunications provider operating three primary segments: Wireless (Sprint PCS Affiliate), Wireline (voice, data, fiber), and Cable TV. The company is currently in the process of selling its "Converged Services" operation, which is classified as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Operating Revenues | $40,115 | $120,356 |
| Operating Income | $10,569 | $34,219 |
| Net Income (Continuing Ops) | $6,346 | $19,318 |
| Net Income (Total) | $6,307 | $8,834 |
| EPS (Diluted, Total) | $0.27 | $0.37 |
| Cash from Operations | N/A | $59,508 |
| Capital Expenditures | N/A | ($37,648) |
| Total Debt | $29,075 | $29,075 |
| Cash & Equivalents | $14,918 | $14,918 |
Note: Total Debt is the sum of current maturities ($6,357) and long-term debt ($22,718). Cash flow from operations is provided for the nine-month period only.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 7.2% ($2.7M) for the quarter and 12.2% ($13.1M) for the nine months compared to 2008. Growth was driven by the Wireless segment and the acquisition of Shentel Cable (Rapid Communications) in late 2008.
- Profitability Decline: Net income from continuing operations decreased 14.0% for the quarter and 7.0% for the nine months. This was primarily due to operating expenses rising faster than revenues, driven by the integration costs of the new Cable TV segment and increased depreciation from network expansion.
- Discontinued Operations: The company recorded a significant impairment loss of $17.5 million ($10.7 million net of tax) in Q1 2009 related to the "Converged Services" assets held for sale. This resulted in a loss from discontinued operations of $10.5 million for the nine months ended September 30, 2009.
- Segment Performance:
- Wireless: Operating income increased 13.8% year-over-year for the nine months, aided by subscriber growth (219,353 subscribers) and EVDO network expansion.
- Cable TV: Operating loss widened significantly to $3.96 million for the nine months due to heavy capital investment in upgrading acquired networks.
- Wireline: Operating income decreased 18.5% due to declining access minutes and one-time equipment sales in the prior year.
Guidance, Outlook, and Risks
- Capital Expenditures: The 2009 budget is approximately $62 million. The company expects spending to slow in the coming quarters, particularly in Wireless and Cable segments. 2010 spending is expected to be substantially lower than 2009.
- Dividends: A cash dividend of $0.32 per share was declared on October 20, 2009, payable December 1, 2009.
- Acquisitions: On November 2, 2009, the company acquired North River Telephone Cooperative for approximately $0.6 million, adding ~1,000 access lines. A $1.8 million upgrade commitment is planned through 2010.
- Liquidity: The company maintains $14.9 million in cash and has access to approximately $46.5 million in borrowing capacity ($9.2M revolving credit + $37.3M delayed draw term loan).
- Risks:
- Sprint Nextel Dependency: The Wireless segment relies on Sprint Nextel for billing, collections, and customer care. Approximately 63% of total operating revenues are remitted by Sprint Nextel.
- Market Conditions: Future capital requirements and cash flows are subject to economic conditions, regulatory changes, and competition.
- Asset Sale: Negotiations to sell the Converged Services assets continue; the fair value estimate has not changed since the Q1 impairment.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final sale price and timeline for the Converged Services assets to assess if further impairments are necessary.
- Cable TV Integration Costs: Monitor the $23 million upgrade commitment for acquired cable systems and the timeline for these assets to reach profitability.
- Wireless Churn Rates: Review the trend in retail churn (2.17% in Q3 2009 vs 1.85% in Q3 2008) and its impact on future revenue stability.
- Debt Covenants: Confirm continued compliance with credit agreement covenants, especially given the shift in capital spending plans.
- Accounting Correction: Note the prior period adjustment regarding asset retirement obligations for co-located cell sites, which reduced retained earnings by $1.0 million as of Dec 31, 2008.