Shenandoah Telecommunications Company (Shentel) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Shentel provides broadband, fiber, voice and video services in the Mid-Atlantic and owns 220 cell towers. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $71.8 million | $66.9 million | $214.9 million | $197.4 million |
| Operating income (loss) | $1.5 million | ($1.8 million) | $6.6 million | ($5.3 million) |
| Net income (loss) | $1.6 million | ($2.7 million) | $5.4 million | ($6.6 million) |
| Diluted earnings (loss) per share | $0.03 | ($0.05) | $0.11 | ($0.13) |
- Revenue increased 7.3% in Q3 and 8.9% year to date. Broadband drove growth, with nine-month broadband revenue up 9.7%; Tower revenue declined 1.8%.
- Operating margin was 2.1% in Q3 versus negative 2.6% a year earlier, and 3.1% year to date versus negative 2.7%. Net margin was 2.2% in Q3 and 2.5% year to date. These reported margins include unusual gains and expenses noted below.
- Glo Fiber revenue rose 90.5% in Q3 and 98.0% year to date, reflecting network expansion and subscriber growth. At September 30, Glo Fiber served 37,393 broadband data RGUs, up from 21,106 a year earlier. Cable-market revenue was broadly flat in Q3; Commercial Fiber growth included T-Mobile early-termination fees.
- Nine-month operating cash flow was $91.7 million, versus $56.2 million. Capital expenditures were $190.4 million, versus $132.4 million, leaving operating cash flow less capital expenditures negative by approximately $98.7 million. Cash declined to $36.0 million from $44.1 million at year-end 2022.
- Gross debt was $150.0 million ($149.9 million net of loan fees), up from $75.0 million at year-end 2022. Debt was variable-rate; the reported annualized weighted-average effective rate was 6.17%. Total liquidity was reported as $286.0 million, including cash and $250.0 million of available borrowing capacity.
- Total assets were $1.06 billion and shareholders’ equity was $654.4 million at September 30, 2023. Capital spending on Broadband expansion increased net property, plant and equipment to $822.5 million from $687.6 million at year-end.
Material changes and notable items
- Compared with the prior-year periods, Shentel moved from net losses to net income. Revenue growth and lower operating expenses as a share of revenue contributed; reported results also benefited from non-recurring items.
- Q3 other income included a gain from the July 2023 sale of FCC spectrum licenses. The transaction generated $17.3 million cash proceeds and a $1.3 million gain; total consideration was approximately $21.1 million, including liabilities assumed by the buyer.
- Nine-month results also included a $0.7 million pension settlement gain, sales-tax refunds and interest income related to tax refunds. The company received $25.6 million of income-tax refunds and reported approximately $29.0 million in combined net income- and sales-tax refunds during the nine months.
- Impairment expense was $2.6 million year to date, primarily related to assets no longer expected to be used, including Beam fixed-wireless assets and colocation lease right-of-use assets. Q3 impairment was $1.5 million.
- Interest expense rose to $5.4 million for the first nine months from $1.2 million, reflecting higher borrowings and rates. Shentel entered into $150 million of interest-rate swaps; payments begin in May 2024 and are intended to hedge 50% of expected debt.
Outlook, risks and contingencies
- Management expects to draw the remaining $150 million of delayed-draw term-loan commitments by December 31, 2023, primarily to fund Glo Fiber expansion. Principal repayments are scheduled to begin March 31, 2024. The credit agreement includes leverage and debt-service coverage covenants; Shentel reported compliance at quarter-end.
- Management expects cash, operating cash flow, credit-facility availability and government grants to meet anticipated liquidity needs for the next 12 months. It also expects capital expenditures to exceed operating cash flow through 2025 while expanding Glo Fiber to potentially more than 450,000 passings, excluding the Horizon acquisition.
- Shentel reported approximately $90.1 million of broadband grants awarded to serve about 28,500 unserved homes, with performance obligations expected during 2023–2025. It received $18.3 million in additional awards during the first nine months of 2023; grant payments depend on build-out milestones.
- On October 24, 2023, after quarter-end, Shentel agreed to acquire Horizon Telcom for $385 million: $305 million cash and $80 million in Shentel shares. The deal is subject to approvals and customary conditions and is expected to close in the first half of 2024. Planned funding includes existing cash, credit facilities, $275 million of financing commitments and an $81 million preferred-stock investment from ECP. The company is evaluating the transaction’s financial-statement impact.
- Commercial Fiber growth included T-Mobile early-termination fees of $2.9 million year to date. T-Mobile had disconnected 281 backhaul circuits by September 30; Shentel expected approximately 80 further disconnects.
- Management said it may explore strategic alternatives for its tower portfolio as it seeks additional growth capital. It cited economic, competitive, regulatory, technology, labor, capital-access and customer-demand factors as risks to cash flows. Management did not expect current litigation to have a material adverse financial impact; no risk-factor updates were identified in this filing.
Important facts for investors to verify
- Whether the planned Horizon acquisition closes on the stated terms and schedule, and the resulting debt, dilution, preferred dividends and financial impact.
- Whether Shentel draws the remaining term-loan commitments before their December 31, 2023 deadline, and how higher debt and variable rates affect interest expense and covenant headroom.
- Glo Fiber passings, subscriber additions, penetration, capital requirements and returns, given that planned investment is expected to exceed operating cash flow through 2025.
- The durability of earnings and cash generation after separating recurring operating performance from spectrum-sale, tax-refund, pension-settlement and T-Mobile termination-fee effects.
- Progress on grant-funded build-outs and the effect of further T-Mobile circuit disconnects on Commercial Fiber revenue.