Good afternoon, everybody, and thanks for joining for our next discussion, which hopefully is gonna be with Jim Butman, CEO of TDS, although he's missing at this point in time, and Ed McKay, COO of Shentel. Delighted to have them both back at the conference. I think the perspectives we get from speaking to Jim and Ed are always just super insightful in helping us shape how we think about the industry, because they've both got the benefit of operating across very diverse infrastructure: cable assets, fixed wireless assets, fiber assets, copper assets. And so can sort of compare and contrast the, you know, benefits and challenges in those different assets in a way that nobody else can. Ed, thanks so much for joining us today. We really appreciate it.
You're welcome. Glad to be here. Appreciate the opportunity.
Yeah, no worries. Sort of to kick things off, we were sort of speaking before the session started about the two transactions that you're about to close. You're selling towers, you're buying fiber assets. I'd love to just kick off with your perspective of what that says about sort of relative values for infrastructure assets. I guess simplistically and self-servingly, it suggests that this is a good time to sell tower assets. Maybe they're decently valued, or at least you got a good value for yours, and it's a good time to buy fiber assets. You know, maybe holistically, they're undervalued. Yeah, what's your sort of perspective on what we should read from these transactions into the values for these two different asset classes generally?
So when we sold our wireless business to T-Mobile back in 2021, you know, our tower assets were no longer core assets. We've always said we would consider, you know, selling them if we had an opportunity to redeploy that capital, and we felt that with the acquisition of Horizon Telcom in Ohio, this was a great time to explore the sale of those assets, and we were very pleased with the multiple we received, you know, significantly higher than the publicly traded comps. So we felt like it was a good use of those of the sale and the proceeds to help fund not only our Horizon acquisition, but to help provide growth capital for our Glo Fiber broadband expansion.
And, you know, that obviously makes a ton of sense. Can we sort of extrapolate from the Horizon transaction and the Glo Fiber, the sort of prioritization of capital for broadband assets, that broadband assets are sort of undervalued more broadly, or do you think it's very specific to the asset that you bought?
Well, well, we certainly believe in our case, the broadband assets are undervalued, you know-
Yeah
... particularly a company like us, that is, you know, very quickly primarily becoming a fiber-to-the-home provider. You know, this past year, our Glo Fiber markets reached more passings than our incumbent cable markets, so we're excited about this fiber-first growth strategy and even accelerating our growth further.
Jim, thanks for joining us. I'm glad we found you.
Sorry.
Really appreciate you hopping on today.
Sorry. They've had me in a virtual room somewhere. I was lost.
Lost in virtual space.
Yeah. Thank you, Ed, good to see you. I see you once a year. We keep talking about getting together, but we don't.
We need to do that.
Yeah.
Good to see you as well.
Yeah.
Awesome. So Jim, you ended 2023 with 1.7 million total locations, of which 800,000 were fiber. You beat guidance. You're slowing the build a bit in 2024, I think largely because of the interest rate environment. But when I look at the trends in the fiber business, they just look awesome. You're growing ARPU at 5%, revenue at 6%, EBITDA at 20%. I wouldn't have thought that the rise in interest rates on their own would sort of warrant a pulling back in the business, just given what you're able to deliver on the other side.
Yeah. Well, Jonathan, thank you for having me, first of all today. I didn't get to say that. And, so look, I'm glad you recognize we have more opportunities than we can fund, basically, is what it is. A bit, is what I would say, but I want to explain it. So over the last 2 years, we've spent over $1 billion in capital, right? Building out networks, really focused on our out-of-territory markets. A lot of our ILEC now is the best economic areas we've fibered up. We've got DOCSIS 3.1 in cable. We build all new fiber, new subdivisions with fiber. So a big part of our build, the front-end part of it, we've spent. However, the pullback is in our ILEC and cable, and we are continuing to...
Continue to build at the pace, roughly the pace in our out-of-territory. Okay, so I want you to understand in the mix, all right?
Yep.
The other thing we're doing in 2024 is we are doing all the engineering for what is a significant A-CAM build, okay? So really, this is the year we're doing a lot of engineering for the ILEC, and next year, that capital will come in. So we want to keep the fiber out-of-territory markets going, all right? The other thing that we're doing is, obviously, we've got to be responsible with our leverage ratios, stay within our, our prudent guidelines of what we want for leverage ratios. And I, the other thing is the market likes what we're doing. We've been spending a lot of, you know, we've gone negative free cash flow.
We've spent a lot of money over the last five years, and now we wanna show in aggregate, and the market likes it, is we wanna show the great revenue growth and the trajectory of that revenue growth and the improved, you know, OCF. So the timing is kind of right, and you're right, though. The interest rate environment isn't pretty, right? And so I would say in the short run, all of this timing, we feel like it's a little bit of a puzzle that as we do all the engineering and we get into the next years, hopefully the interest rate environment will be better, better for lending and, you know, we'll have other sources of funding is how, you know, we were hopeful that we will find other sources of funding when the market gets better.
Got it. And so this is, it sounds like, well, I guess the question is, is the threshold for your return threshold for making investments in fiber gone up as a function of the rate environment, or you're pulling back a little bit more just to stay within the constraints of your leverage targets? It's more about sort of access to capital than it is about the hurdle rate going up.
It's actually both, is what I would say, you know. And so we just wanna, the great news is we got a big part of the build. We got a lot of service addresses. Like I always say, we've now got a lot of service addresses, and we've been making nice pace on penetrations, but now this is the year I keep telling the team, "You know, the previous years have been fiber service addresses, fiber service addresses. Now it's customer service addresses.
Yeah.
So we wanna demonstrate, I think it's gonna. I believe we're gonna show a really nice story this year after a lot of upfront capital. They're now gonna see in aggregate, people are gonna start to see the fruits of the significant capital investment. But you're right. I mean, we're bullish on this. I mean, our. So when you look at our IRRs, you know, I know I told you a year ago that, you know, we target 11%, and most IRRs between 11%-15%. Those have held up. I mean, we are just really pleased. If anything, I mean, we're hitting the penetrations that we've targeted, and we're actually finding the cost of operating these systems, the new markets, are lower. So, you know, we're still being conservative.
You know, we're holding to our penetration rates. We're beating them in many cases on the front end, but we're also realistic about long-run competition, and so, we're feeling really good.
Jim, have you explored the ABS market as a cheaper source of debt for helping to fund the investment in fiber assets?
Yeah, Jonathan, we have. In fact, I always say we, we explore everything, right?
Yeah.
We don't... There's hardly ever a rock we don't overturn. So for us, we've been able to, you know, fund with debt and low-cost preferred. We got low-cost preferred at 6.5%, so when you think about that rate-
Yeah
... and we don't have to secure, you know, secure our assets or, you know, and we don't have to secure, customer contracts, we've got the cost of capital or the low cost of debt for the plan that we've got right now. So, we feel pretty good with our plan and what we need to fund it.
Makes sense. And so one of the templates that we've seen crop up recently, and there's a lot more sort of talk about it, I think, from amongst ILECs in particular, is taking assets, moving them off balance sheet into a JV-
Yeah
... bringing in a financial partner, funding off balance sheet. Could that be a way for you to reaccelerate the pace of investment, while at the same time showing investors the returns on the piece that you've already built?
Yeah. As I said, we have, we have gone down this path. We've looked at it. We've actually engaged a process to do it, and this was, you know, a couple of years ago when we were-
Yeah
... trying to sort out everything, and that's when we ultimately landed on the lower cost preferred, instead of, you know, we have full control. We didn't have to give up some of the opportunity. So we have looked at it, and I will always say, I think it's something that we will look at in the future too, because we do have more opportunities than we can fund. So, so I think it is an opportunity. We've looked at it, but for the size of our plan right now, we feel okay.
Okay. And when I look at where you're spending fiber, I mean, I think you articulated it right at the beginning, which is the spend is going primarily into new builds, not so much into upgrading the old, the ILEC infrastructure. Why are the returns in new builds better than in the existing footprint, Jim? I would've thought because you've got pre-existing-
Yeah
... infrastructure, it would be cheaper to upgrade that than it would be to do brand-new builds.
It is. You're right, and what I would tell you is, we've done the most economical builds, the best returns, right, in the areas that make most sense. So we've gotten to a lot of the really attractive, we call it, in territory, fiber deeper. We've done those. The other side, though, Jonathan, is, you know, we are really focused on transforming the company, and to transform the company, we need revenue growth. So I'm not saying we're not protecting the core market, but we've done the best. We now have A-CAM to do the very rural areas, so we're gonna. We feel really good about the plan.
But to really transform the company, I think I heard Ed saying this, you know, what I'm really proud of, you know, over the last, whatever, 10 years, 'cause we started this by buying cable operations. If you look at our 1.7 million service addresses, we've now are bigger in cable and our out-of-territory fiber than we are in what was, you know, the origins of traditional telephone operation. You know, we got 1.7 million service addresses, and 800 are now in the core business of the ILEC's.
Yeah.
So, you know, you've gotta have growth, right? Because the challenge with just overbuilding yourself is you're pretty preserving growth. Still a good IRR, but you don't get the growth.
Got it. And then Ed, switching over to you, you're accelerating your build in 2024, I think. You're still targeting an incremental 355,000 fiber locations?
Yeah, we are. So last year we constructed almost 90,000 new fiber passings, you know, finished the year with about 450,000 total broadband passings. You know, 230,000 of those are fiber, so we're now a fiber-dominant company. I think for 2024, we're targeting over 100,000 additional fiber passings, so we're accelerating that build. So really, over the next three years, the goal is to reach over 600,000 homes and businesses with fiber, and that will include new markets in Ohio that are part of our Horizon acquisition that we discussed.
Yep. And how have higher rates impacted the opportunity for you?
They really haven't slowed down our build pace at all. You know, in fact, you know, we've increased the number of targeted homes-
Yeah
... we're building fiber to. And I mentioned, you know, we did recently announce the sale of our tower business, so we're using that to fund, you know, not only the Horizon acquisition but also our continuing broadband growth. So we feel like we're in a good position from a capital perspective.
From a cost to build perspective, I think last time we spoke, you were in the $1,000-$1,400 range. Is that still the cost to pass?
Yeah, we're still in that range. You know, we did see a 5%-10% increase in both our labor and material costs, you know, late 2022, early 2023, but since then, costs have remained, you know, fairly stable.
Yeah
... you know, when we launched Glo Fiber in 2019, first three years of construction, we were in the lower half of that $1,000-$1,400 range. In 2023, we were in the upper half of the range. We expect to be in that upper half in 2024 as well.
Got it. And in your sort of long-term planning, it seems that you're underwriting target penetration of around 38% in your fiber markets, which is a little bit lower than I would've expected. Most of your fiber peers are sort of targeting 40%-45%. What's the difference in your markets? Is it all demographics?
Well, I would say historically, Shentel has been a little more conservative on our projections than some of our peers in the industry.
Yeah. Yeah.
I think demographics may play a role. Some of our markets may not be as strong as some of our peers. You know, we do focus on smaller Tier 3, you know, Tier 4 markets in rural areas. I think another difference is, you know, unlike some of our larger peers, you know, Glo Fiber builds are 100% greenfield builds into new markets, so we're not overbuilding our existing service area. So I think that's a factor there. But from a competitive standpoint, you know, we're targeting areas where there's only one broadband competitor. You know, we avoid areas where the LEC has deployed fiber. We avoid areas where there's another fiber overbuilder.
So I'd say on average our markets are, you know, probably a little less competitive than some of our larger peers.
Yeah. Your ARPU, Ed, is higher than your larger peers. To what extent does that hamper penetration, do you think? What's the sort of trade-off between the two?
So, our ARPU for our Glo Fiber markets is in the mid-$70 range. We were actually able to grow ARPU by about 4% in 2023. You know, we've been very successful at the mid and high end of the markets. You know, almost half of our customers choose speeds of a gig or higher. You know, we think we have a premium fiber product, so we're focused more on maximizing the overall revenue and margins, as opposed to maximizing, you know, subscriber numbers.
Yep. Interesting. And so when I look at the stats on cable versus fiber, it's really interesting. You've got higher ARPU on cable, but also higher churn, lower ARPU on fiber, lower churn. Is there a relationship between the churn and the ARPU, do you think?
Maybe some. Our cable markets, they're typically smaller, less competitive. Our ARPU there was about $83. You know, churn was about 1.65% last year. You compare that to Glo Fiber, you know, $76 ARPU and 1% churn. So churn is definitely, you know, lower in our fiber markets. I think the price-value proposition is better with Glo Fiber than it is with cable. You know, we've got a lot more capacity on those fiber networks. We're able to offer, you know, much higher speeds because of that. You know, we've had very, you know, strong Net Promoter Scores in our Glo Fiber markets, you know, over 60. So we're doing well there.
You know, in cable, you know, we still have decent net promoter scores, but, you know, definitely not near what they are in Glo Fiber.
Yeah.
I think another factor is that the demographics in our cable markets typically aren't as good as the demographics in our Glo Fiber markets. So there is more involuntary churn in those markets, but over time, I would expect the ARPUs to converge. You know, probably a slight increase in our Glo Fiber markets, and I would expect the ARPU in our cable markets to come down somewhat as we see some additional competition.
Got it. Jim, you mentioned at the beginning that you've accepted Enhanced A-CAM funds. I think it's 270,000 locations. Were those locations that would've been eligible for BEAD, and you're effectively choosing Enhanced A-CAM over over BEAD as a funding source?
Mm-hmm. Yes. Yeah.
Yeah.
I think I said even last year, I don't know, that that was our preferred... That's what we wanted. I mean, we work very closely with industry, coalitions, and, you know, we were very involved in helping architect the Enhanced A-CAM program. And-
Yeah
... so what we like about the EA-CAM, EA-CAM program compared to BEAD is it's an ongoing revenue stream all the way to, you know, 2038. So it doesn't- it not only pays for the build, but you get ongoing revenue streams for maintaining the networks and, you know, so that's what we like about that program. You know, the other part of it is, by choosing A-CAM, these are not eligible for BEAD, so, we kind of have certainty with kind of what it looks like from a competitive market standpoint. So, yeah, we're feeling good about the EA-CAM program. However, it's a big, you know, it's a big commitment in terms of a bill.
Yeah. And are you doing those A-CAM markets with fiber?
Mostly fiber.
Okay.
I mean, we're going to... Right now, we're going through all the engineering. We're gonna be smart about the builds. But you know, I have to tell you, in the long run, I think they'll become fiber.
Yeah.
But there will be areas where it makes sense, where we can use, you know, short copper loops. I mean, if we can get to the 120 and we're providing good service, we'll do it. You know, we're not gonna throw, you know, just money because it's fiber, but it'll vary, the vast majority will be fiber.
Got it. That makes sense. Yeah, I was wondering, so when I looked at the 120 requirement for A-CAM, it's, you know, if it was sort of putting money into upgrading copper, I'd wonder about whether that would be sort of a good long-term investment, but if it's mostly fiber, it's sort of a moot point.
Yeah, right.
What are your plans for the copper locations that you'll be left with after you've sort of upgraded everything to fiber that makes sense?
Well, we'll always have... You know, the tricky part in, or the dilemma in, ILEC, the traditional telephone areas is, while much of it, even given markets will be fiber, you'll still always have some copper that you didn't get to. So you, generally, you're gonna be running both networks, okay? We do have one network that we've converted totally to fiber, and we're decommissioning, decommissioning it, no, decommissioning it. Sorry about that.
Yeah.
We're doing that now. But, you know, we're pretty hopeful that by the time we get done, we get out there in 2028, 2029, our ILEC should be pretty fortified.
Yeah. And in that market that you're decommissioning at, can you give us a sense of what the difference in sort of operating cost and maintenance CapEx per location is?
Yeah
... between a fiber, fiber-only market and copper?
Yeah, so I can give you a few facts here.
Yeah.
What we find in a fiber market, an all-fiber market, 'cause we've, you know, we obviously got our entire territory that's all fiber, and then we've got copper. And what we tend to find is our trouble index is reduced by 25%, so it's 25%. And I wanna talk about this a little bit because that's somewhat, you know, I think that the data is still early because, you know, your trouble index in fiber markets when you're doing new installs, you're gonna have more misfires, you're gonna have some of that. So when you get to steady state, that trouble index is gonna be even lower. The thing that's really impressive, though, is the fact that our dispatches in our fiber markets are 50% lower. All right?
So that means you're not rolling a truck, because what happens is, the tools that our technicians and our helpdesk have remotely can do so much more with fiber to eliminate all those truck rolls. So, you know, we don't have the full cost metrics yet because we wanna have, you know, we wanna have time to have mature fiber, all-fiber markets and compare to all copper, but we're really encouraged with the cost curves here.
Ed, do you have any specifics on sort of cost comparisons between fiber and copper?
I don't have that.
Or, um-
I wanna make sure I'm hearing you say, though, in what area? Copper versus fiber what?
Oh, so I was actually flipping the question over to-
Oh
... to Ed, but-
That's fine.
Yeah, so I sort of, Jim, for you, I'm interested in sort of two scenarios. You've got new-build fiber, and I wonder how that compares to copper, but, like, what would be super interesting, actually, would be in the markets where you've made the, you've decommissioned the copper entirely, and now you're fiber only. Like, what happened to the cost structure in those markets? But I, yeah, I think your answer was, it's like fiber, fiber economics are still early, and you don't wanna prejudge it too much.
Yeah, that's right. Like we're, you know, we've got good analytics on this, but it's still-
Yeah
... too early to give you, to draw specific. Definitely the trend lines are great, but we don't have a good enough soak period for that to compare.
Yep. I guess you had a-
I'll just say-
Go ahead
... I don't have any specific data on copper, but I will say with fiber compared to HFC, we're seeing about a 50% savings in our, in our operating costs when you factor in maintenance, repairs, and power.
That's right.
So it does make a big difference.
Yeah.
50% savings just on those three categories or in the, on total costs?
Correct. That would be in the operating cost on those three categories. And but we also have less maintenance CapEx as well.
Yeah.
With the fiber networks, we have plenty of excess capacity day one, so we're not having to spend additional dollars on capacity as customers, you know, use more data, for example.
Yeah. And Ed, is there a sort of a cost per location that we can think of for fiber locations, and what it would be for HFC locations, so we can understand what those, like, three categories amount to in savings overall?
Yeah, at least in our networks, and again, they're fairly rural, but it translates to between $30-$40 annually per household passed as far as savings.
Interesting. And then on the subsidized locations front, I think you guys are doing 30,000 locations, subsidized. Are those all state-funded, state-funded builds?
Correct, they're all state-funded builds. They were through the American Rescue Plan Act funds. You know, we're still targeting roughly 30,000. You know, right now we've been awarded $85 million in government grants so far. That's to about 25,000 passings, and, you know, we're expecting those grants to cover more than half of the total build costs, you know, for those projects.
Got it. And then is BEAD an area of interest for you beyond those, those locations? Is there a decent opportunity within, you know, surrounding your markets for, to go after BEAD as well?
Well, we're not as excited about the BEAD program.
Ah.
You know, with the state grants, with the ARPA funds, there were fewer strings attached than what we expect-
Right
... to see with BEAD. So we're gonna be hesitant to be a big player in BEAD. You know, if there are, you know, you know, mandates on labor rates, you know, mandates on pricing, and we're also worried about some of the onerous reporting requirements. So we're watching to see what happens, but with what we've heard so far, we likely will not be a big player in BEAD.
Got it. I guess the same, I mean, that's part of what's driving your decision as well, Jim?
That's correct.
Yeah. It's the strings. Got it. Gentlemen, we've run out of time, unfortunately. I only got halfway through my questions. So we'll have to pick this up again sometime soon, but really appreciate both of your perspectives today. This has been very valuable. Thank you.
Thank you, Jonathan.
Glad to do it.
Appreciate it.
Thank you, Jonathan.
Cool.
Thank you.