Shenandoah Telecommunications Company (SHEN) Earnings Call Transcript & Summary

Good afternoon, everybody. Sorry for the long delay in getting this session started. I had a bit of a technical snafu on my end. I'm delighted to introduce Jim Butman, CEO of TDS; Ed McKay, COO of Shentel. Guys, thank you very much for joining us today. We really appreciate it. So we've got companies here deploying fiber. We've got cable companies. We've got fixed wireless broadband companies. And the 2 of you are doing it all, which is going to make for a really interesting conversation. You're in an uncommon position of having an informed view of all of these different technology platforms.

And I guess, Jim, to set the stage, can you give a quick breakdown of the assets today, what that -- and what the breakdown is today? And what you -- what it would look like ideally in 5 years?

Yes. Sure. First of all, thanks, Jonathan, for having us. It's a pleasure to be here and share our story. So if you look at our business, if we look at broadband households, we saw it evenly distributed. We've got, today, about -- and I'm going to talk about the technologies and the capabilities. So we're about 400,000 fiber-connected homes and businesses and about 500,000 still DSL in our incumbent local exchange area and then about 500,000, so 500,000 cable HFC, 500,000 DSL and 400,000 fiber. So that's today. So that gives you that 1.4 million addresses today. We have plans, over the next 5 years, to grow the business and transform the business to be much more fiber-centric, and we're going to grow the business to 2.2 million service addresses. And so that breakdown of fiber is where the vast majority of investment is going. So the 400,000 fiber addresses today will grow to close to 1.3 million fiber addresses. And most of that is in our out-of-territory. Some of it is what we call "fiber deeper" in the ILEC part of the business. So our 500,000 DSL will drop to 400,000. And then our cable operations will grow, but not -- it will grow with new neighborhoods and we deploy fiber in that. And all of this is not planning -- it's not forecasted what we think will happen with infrastructure funding. This is just the plan without infrastructure funding.

Got it. And Jim, the cable infrastructure -- the areas that you serve with cable today, are you overbuilding any of that with fiber?

Not really. So the cable operation is doing great. We've got very high penetrations. The networks capable of 90% of our cable network is -- we service up to gate speeds. So the only place where we've done fiber in our cable operations is new neighbors -- new neighborhoods, all new neighborhoods, in a small -- a few small operations where the HFC plant was so old that it made sense to go all the way to fiber. There were some interesting -- there's usually some unique circumstances around that. And then there's a couple very small areas where a fiber overbuilder is coming in, and we just made a decision recently, it's pretty small, but we're going to go all the way with fiber to compete with that fiber overbuilder.

Got it. And when -- and so how have they responded to that? When they see you coming in with fiber, does that stop them in their tracks?

Like the overbuilder, would you say?

Yes. The overbuilder.

No. I would say though, we're aggressive. I mean we're aggressive in protecting and making sure that we meet the competition. And we do it economically. I mean if it wouldn't make sense, we wouldn't do it. This is -- this happens to be a situation where we happen to have a lot of conduit. There's always unique circumstances. We have a lot of conduit where we can pull in the fiber. So it's a relatively easy one to do. That wouldn't be the case at all.

Got it. And you mentioned that going from 400,000 to 1.2 million fiber homes assumes nothing in terms of federal subsidies. What is the opportunity for going after subsidies and pushing that number even higher within your ILEC footprint and then, I guess, around the outsides of the ILEC footprint?

Yes. So we're a nice recipient of A-CAM funding. So we're still in that bill. Our -- what we want to do is we are working hard with other people, similar to us, in the industry to lobby for the extension of that A-CAM program, okay? So I'll just put that over there. So we're working on that to extend, to increase the speeds in our A-CAM program above 100 meg, okay, and actually, much more than that. If we extend -- and we think we're going to be successful in extending the A-CAM program. We think we can go a lot more of that to direct fiber. So that's going to help our ILEC situation. Now the new -- the BEAD funding, the new infrastructure plan, we've got plans well underway to make sure that we've got engineering designs and kind of our whole strategy. We're hopeful that, that can -- now this is the upper end because we've got the A-CAM funding. But it's well over another 100,000 addresses that we're going to -- well, probably 150,000 that we're going to target to go after. Now that's early planning, okay? But we have tried to scope it out.

Yes. And Jim, that 100,000 to 150,000 is inside the ILEC footprint? Or are you looking at...

Yes. Yes. That's largely -- our philosophy -- Jonathan, it's a great question. Our philosophy is, first, look, we've got a huge opportunity in out-of-territory fiber. That's where our highest priority is, to go out-of-territory. We want to protect what we've got in the ILEC first. Now if, again, if there's a unique opportunity, the way it's carved up and we can edge out, we do it. But we want to save most of our powder for our out-of-territory program.

Got it. So Ed, switching to you, what are your assets? What does the breakdown look like today? And how does it evolve over the course of the next 5 years?

Sure. Well, first of all, Jonathan, thanks for having us today. So at the end of 2021, we had roughly 300,000 broadband passings. About 200,000 of those were in our incumbent cable markets, about 75,000 were in our Glo Fiber greenfield overbuilder markets and then about 30,000 were in our Beam Fixed Wireless markets. So we do expect our cable passings to increase modestly over the next 5 years, but our primary growth will come from our Glo Fiber markets. So we're on track to more than double our households passed in our greenfield Fiber to the Home overbuilder markets this year, and we plan to grow that to over 450,000 by the end of 2026. Now for our Beam Fixed Wireless, we're likely not going to be expanding that beyond the roughly 30,000 passings we have today. But in total, we plan to grow our broadband passings from about 300,000, to over 700,000 in the next 5 years, and that's driven almost entirely by Fiber to the Home exchange.

Got it. And why not the expansion of Fixed Wireless broadband? Are those areas where we're likely to see BEAD funding drive fiber investment?

Basically, we stopped Fixed Wireless expansion once we saw all the government funding that was coming into our markets. We believe with the funding that's out there today, that will justify building fiber to the vast majority of the homes we've previously targeted for our Beam Fixed Wireless. And we're actually going after some of that funding ourselves.

And so I think you're already getting funding for 16,000 homes on fiber builds. Is that -- was that all under RDOF? Or is that state programs?

So that was primarily state programs. So -- and those were funded by the American Rescue Plan Act. We are continuing to go after additional grant funding as well. Our funding so far has been in the State of Virginia. We think there's some opportunities in the adjacent states as well, but probably an additional 10,000 to 20,000 passings beyond the 16,000 we have today is what we're targeting.

Targeting in, sorry, with the BEAD program or with state programs?

Yes. We think that will be with the combination of BEAD and the state programs that are being turned up right now.

Got it. Got it. And so in -- focusing in on the cable footprint for a minute, what are the competitive dynamics like in your cable markets? What are you mostly up against?

Sure. Well, our cable markets are primarily very rural. Over 90% of our cable passings either have low-speed DSL as a competitor or no competition. In fact, we operate as the let in our dual incumbent for about 8% of our cable passings.

Got it. And what's the upgrade strategy for the cable plant? Are you going to like gigahertz, 1.2 gigahertz, with a mid- or high split? And does it go from there to DOCSIS 4.0?

Sure. So right now, 100% of our cable plant is DOCSIS 3.1. Gigabit speeds are available to 99% of our passings. We are upgrading or building in new neighborhoods with Fiber to the Home. But we believe DOCSIS has a long runway, particularly in our rural markets. So we're currently finalizing our upgrade plans, but we likely rely on a combination of upgrades to a mid-split, upgrades to a higher split and higher capacity, 1.2 gigahertz or higher. And we also plan on some selected Fiber to the Home overbuilds as well in the more dense area. And part of our strategy is reclaiming capacity that's currently being used by linear video. So we plan to launch an IP-based streaming service later this year in our cable markets and very similar to what we've launched in our Fiber to the Home overbuilder markets.

Got it. And so help us understand that trade-off between areas where you're deploying fiber, replacing cable with fiber, areas where you're going through the HFC upgrade. What's the sort of the difference in cost, difference in dynamics that make those -- that drive those decisions?

So based on our initial analysis, we think a Fiber to the Home overbuild is going to be 3 to 5x more expensive than a DOCSIS 4.0 upgrade. So there are ongoing operational savings on our fiber networks. There's fewer electronics in the field. There's less cable replacements over time. But that still doesn't offset the significant difference in that initial investment. So we think with an upgrade to DOCSIS 4.0, we can get to these multi-gig speeds downstream, gig speed upstream. And it would be competitive there, but contrast that with our fiber networks, the fiber networks that we're deploying are already capable of 10-gig upstream and downstream today.

Yes. And so help us think about sort of 2 other components, the analysis, Ed. So on the one hand, we've been told that it's a lot cheaper to run an all-fiber infrastructure with no amplifiers, no active elements in it, lower OpEx and maintenance. And so that's sort of -- while it's 3 to 5x more expensive to deploy the fiber, you've got lower OpEx and maintenance CapEx on the other side of it. And then, as you mentioned, you've also got a product that can go all the way up to 10 gigs -- gigabits per second, which you don't on DOCSIS infrastructure today. So how do you weigh the cost savings and the competitive advantage you would have with the fiber product into the analysis?

Well, for the reason you talked about, we think fiber makes sense. But in our markets, it's only in the most dense areas where we think it makes sense, and that includes commercial areas. We think there's some significant upside for commercial business as we build out fiber into some of these more dense areas.

Got it. Okay. Jim, switching back to you, you're obviously in an equally great position to kind of understand the benefits and the costs of both parts. Do you see the same 3 to 5x higher cost for deploying fiber versus upgrading with DOCSIS?

Yes. I think our markets in cable are quite a bit different than Ed's. We're in some pretty attractive areas, St. George, Utah, Bend, Oregon. These are rapidly growing great areas. So I would probably -- look, I'm not the technologist, but I would see it this way. Our crossover -- we've done a lot of node splits. We got a lot of fiber close out there, right? So in these dense neighborhoods, we'll do what's best. If DOCSIS 4.0 is the right solution, the more economical, that's what we'll do. But I would probably -- this is just my intuition. My feeling is that going all-fiber, depending upon -- we're going to let others who are close to cable labs, we're going to let others kind of do the 4.0, but I think our economic crossover is going to be different than Ed's because his is such a rural area.

It's -- and it's really just a function of the density, I'm assuming, right? So it's the distance between the node tweaks and the closest fiber that has a huge impact on the cost. What about competitive dynamics though? Are you -- for your cable infrastructure, in areas where the ILEC is upgrading to fiber, are you more likely to upgrade to fiber in those sorts of situations?

So here's what is happening even in our markets in St. George, Utah. I'm just picking some of our more dense, rapidly growing cable markets. The only place the incumbent so far is putting fibers in new neighborhoods, and we're doing the same thing. So we're just meeting the competition in new neighborhoods. It's largely DSL. We've got -- the one thing I will say that we feel really great about is we have really strong penetrations in all 3 segments of our -- whether it's the fiber markets, the new markets we've launched, whether it's the -- even our ILEC markets because we've got some of the dynamics of no competition, plus very rural. And in cable, we're over 50% penetration in our cable markets, which is -- would indicate a 60% market share and in some cases, plus. So we're feeling really good about the competitive position at this point.

Got it. Got it. And the -- are you overlapping with ILEC's, like Frontier and Lumen, who have big ambitions to upgrade a lot of copper-to-fiber over the course of the next 5 years in those markets?

Yes. So we'll face -- there's a lot of discussion of that, right, and commitments that they're making to the financial community. We have not yet seen it. Our view is this is important in 2 areas. So obviously, we compete in the cable against these carriers. That's typically a 2-player market. That's fine. We'll still have a really good business even if they do. And I think it's going to take them a long time to get there, especially, our view, is the markets we operate in are not NFL cities, right? This is not where they're going to put their first powder. And so we're -- with the other places in our out-of-territory markets, we face both the ILEC, Lumen, a lot of cases, Lumen, it's Frontier, AT&T, plus it's largely usually Comcast or Charter, okay? Our modeling and our view is, as long as we get there first, we will have a good foothold in that market even if the incumbent comes back later. We know what that feels like, right? The beauty Ed and I have is we compete in all segments, and changing that reputation takes a long time. You're kind of the slow, old, underinvested -- I'm just -- I'm talking about myself even. It just -- it takes a long time to turn that around. So we think we're going to -- we still will be in a strong position, if they do fiber-up.

So you're happy to be in 3-player markets as long as you're the sort of second one in with a gigabit per second-capable product, it seems like. You can make the economics work with roughly 1/3 of the market. You don't need half of the market, it sounds like.

Yes. Well, right now, in our newly launched markets, our penetrations in a 3-player market are in the mid-40s.

Right. But that's because you're up against DSL, which is sort of a nonproduct versus your fiber. But if that DSL gets upgraded, I would assume it's going to be sort of more like a 3-way split in terms of market share. Or is what you're saying that if you get there first, you think you sort of lock in a market share that's higher than 1/3 of the market?

Yes. I mean again, I'm pretty proud of our model. We pick markets that a lot has to do with markets we pick where they've significantly underinvested in, okay? We're still -- and it's -- while it's eroding somewhat, we still don't look at video as in either of our strategy. We have an IPTV video that serves both our cable and our ILEC. So I would say, our product set, I'm still confident is going to beat the other 2, okay, or at least match one of them and beat the other. But fiber is key. They're going to have a mixed network. The incumbent is still going to have a mixed network. And right now, in our out-of-territory markets, people don't believe this, but our attachment rate for video on our IPTV product is 39%. That's why we're getting such high penetrations because if you don't offer video, we've done surveys, and 30% of the market said they wouldn't have chosen us as the new fiber data provider. So it will change over time. But you're right. We believe that if you get there first with a really good reputation, a really good product, you're going to likely maintain an edge over the other 2 providers.

Got it. We've only got a minute left. So my last question for you, Ed, and again, apologies for starting this session late, is how do you think about the risks to market pricing as competitive intensity in the market sort of steps up, with some of these markets going from 2 players to 3 players, Verizon and T-Mobile coming in with fixed wireless broadband, what happens to ARPUs in these markets as all of that happens?

Well, I think there's certainly some risk to our ARPU, but we've seen very limited overbuilding activity in our markets. I think the business case is challenging for overbuilding in our markets due to not only income demographics, but also density. And when we're building the Fiber to the Home, we're typically passing closer to 100 households passed from a mile of fiber we deploy. You compare that to our cable markets, we're less than 40 households passed for miles. We really don't think we have the density there that some of these overbuilders would need. So we think we have less exposure. And as far as Fixed Wireless, we stopped our Fixed Wireless deployments because we don't believe that competes well with gigabit Fiber to the Home or gigabit over a DOCSIS system.

Got it. Guys, this has been great. I really appreciate both of you joining us today. Thank you very much.

Thanks, Jonathan.

Thank you, Jonathan.