OREANDA-NEWS. Shenandoah Telecommunications Company (“Shentel”) (NASDAQ:SHEN) announces financial and operating results for the three and six months ended June 30, 2016.

Consolidated Second Quarter Results

For the quarter ended June 30, 2016, the Company reported total revenues of $130.3 million, an increase of 52.1% compared to $85.7 million for the 2015 second quarter.  The increase was almost entirely due to the nTelos acquisition which was completed effective May 6, 2016.  The integration of nTelos’ operations and the transition of its assets and customers is progressing as expected, with Shentel currently ahead of its schedule on the migration of nTelos customers to the Sprint platform.

Wireless service revenues increased 78.2% as a result of the acquisition of approximately 404,000 postpaid and 155,000 prepaid subscribers from nTelos and Sprint, and a reduction in postpaid fees retained by Sprint.  Cable segment revenues increased 9.3% due to an increase in subscribers and Revenue Generating Units (RGUs), video price increases to offset increases in programming costs, as well as improved product mix with customers selecting higher-speed data packages.  Wireline segment revenues increased 12.9% due to higher fiber lease revenues, as well as higher internet service fees as customers upgraded their services.

Total operating expenses were $136.5 million in the second quarter of 2016 compared to $67.0 million in the prior year period.  Operating expenses in the second quarter of 2016 included $20.1 million of overall integration and acquisition costs associated with the nTelos acquisition, including $5.3 million in the Wireless segment and $14.8 million in the Other segment.  An additional $2.3 million of costs to operate and support the nTelos back office and billing functions until customers can migrate to the Sprint platforms was included in cost of goods and services and selling, general and administrative expenses.

For the quarter ended June 30, 2016, the Company reported a net loss of $7.0 million, compared to net income of $10.5 million in the second quarter of 2015, primarily reflecting acquisition and integration costs incurred for its acquisition of nTelos.

Adjusted OIBDA (Operating Income Before Depreciation and Amortization) increased 48.5% to $55.9 million in the second quarter of 2016 from $37.6 million in the second quarter of 2015.  Continuing OIBDA (Adjusted OIBDA less the benefit received from the waived Sprint management fee over the next six years) increased 32.3% to $49.8 million.

President and CEO Christopher E. French commented, “Our second quarter results include the customers and assets we gained through our merger with nTelos and we’re pleased to have delivered revenue growth and increased OIBDA throughout all of our segments.  This is a transformational time for our company as we work to ensure that we are effectively serving our newly expanded customer base with the consistent coverage and high speed access our state-of-the-art networks provide.  The transition to one blended company is progressing well, and in addition to doubling our customer base we’re excited about the opportunities presented by our increased footprint which has enhanced our presence in the Mid-Atlantic region.”

Wireless Segment

Second quarter wireless service revenues increased $38.1 million or 78.2%, primarily related to the addition of both postpaid and prepaid customers as a result of the nTelos acquisition.   Additionally, the segment benefitted from a reduction in the postpaid fees retained by Sprint as part of the amended affiliate agreement.

Excluding the subscribers added on May 6, 2016 in the nTelos acquisition, during the second quarter of 2016, net postpaid subscribers declined by 1,319 as compared to 5,414 net postpaid subscriber additions in the second quarter of 2015, while net prepaid subscribers declined by 6,912 during second quarter 2016, compared to a decline of 2,352 in the second quarter of 2015.

Second quarter adjusted OIBDA in the Wireless segment was $45.0 million, an increase of 60.5% from the second quarter of 2015.  Continuing OIBDA in the Wireless segment was $38.9 million.

“Our wireless customer base has more than doubled, and we’ve added several highly complementary contiguous markets to our footprint.  During the quarter, we incurred expenses related to the migration of certain nTelos customers to the Sprint billing platform, but we also continued to benefit from a reduction in Sprint’s fees.  We are continuing to improve reliability and coverage in our acquired markets as our upgrade progresses,” Mr. French stated.

Cable Segment

Service revenues in the Cable segment increased $2.1 million or 9.3% to $24.2 million, due to 6.7% growth in average RGUs (the sum of voice, data, and video users), video rate increases implemented in January 2016 to pass through programming cost increases, and customers selecting higher speed data access packages.  Operating expenses increased slightly to $25.2 million in the second quarter of 2016. Second quarter operating income was $1.2 million compared to an operating loss of $0.4 million in the prior year.

Revenue generating units totaled 130,871 at June 30, 2016, an increase of 6.7% over June 30, 2015.

Adjusted OIBDA in the Cable segment for second quarter 2016 was $7.3 million, up 28.0% from $5.7 million in the second quarter of 2015.

Mr. French stated, “Customers are increasingly demanding more from their broadband provider, and our enhanced products and services position us well to meet those needs.  The strength of our offerings has enabled us to attract new customers and has motivated existing customers to increase their service selection and upgrade their monthly subscription plans.” 

Wireline Segment

Revenue in the Wireline segment increased 12.9% to $18.6 million in the second quarter of 2016, as compared to $16.5 million in the second quarter of 2015.  Carrier access and fiber revenue for the quarter was $12.3 million, an increase from $2.1 million for the same quarter last year, as a result of new fiber contracts.  Operating expenses increased 7.3% or $0.9 million to $13.4 million for second quarter 2016, primarily due to costs to support new fiber contracts.

Adjusted OIBDA in the Wireline segment for second quarter 2016 was $8.3 million, as compared to $7.3 million in second quarter 2015.

Other Information

Capital expenditures were $39.6 million in the second quarter of 2016 compared to $15.6 million in the comparable 2015 period. 

Cash and cash equivalents as of June 30, 2016 were $40.6 million, compared to $76.8 million at December 31, 2015. Total outstanding debt at June 30, 2016 totaled $815.6 million, net of unamortized loan costs, compared to $199.7 million as of December 31, 2015.  At June 30, 2016, debt as a percent of total assets was 56.0%. The amount available to the Company through its revolver facility was $75.0 million, and from the delayed draw term loan, $50.0 million.

“Our balance sheet provides a solid platform for the continued growth of our customer base, and positions us well to enhance our service offerings and capabilities.  The nTelos integration and the expansion of our operations to include additional customers and new markets is progressing well.  We look forward to growing our position as one of the top six public wireless providers in the United States,” Mr. French concluded.

Conference Call and Webcast

The Company will host a conference call and simultaneous webcast today, Friday, August 5, 2016, at 9 A.M. Eastern Time.

Teleconference Information: 
Friday, August 5, 2016 9:00 A.M. (ET)
Dial in number: 1-888-695-7639

Password: 59001676
Audio webcast: http://investor.shentel.com/

An audio replay of the call will be available approximately two hours after the call is complete, through August 12, 2016 by calling (855) 859-2056.

About Shenandoah Telecommunications

Shenandoah Telecommunications Company (Shentel) provides a broad range of diversified communications services through its high speed, state-of-the-art network to customers in the Mid-Atlantic United States.  The Company’s services include: wireless voice and data; cable video, internet and voice; fiber network and services; and local and long distance telephone. Shentel is the exclusive personal communications service (“PCS”) Affiliate of Sprint in portions of Pennsylvania, Maryland, Virginia and West Virginia.  For more information, please visit www.shentel.com.  

This release contains forward-looking statements that are subject to various risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of unforeseen factors. A discussion of factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations is available in the Company’s filings with the SEC. Those factors may include changes in general economic conditions, increases in costs, changes in regulation and other competitive factors.

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

  June 30,
2016		 December 31,
2015
     
Cash and cash equivalents $   40,571   $   76,812  
Other current assets     117,540       51,135   
Total current assets     158,111       127,947  
             
Investments     12,526       10,679  
     
Building held for sale   4,950     -  
Net property, plant and equipment      653,523       410,018  
     
Intangible assets, net     464,146       66,993  
Goodwill   151,730     10  
Deferred charges and other assets, net     10,855       11,504  
Total assets $   1,455,841   $   627,151  
     
Total current liabilities     138,474       60,729  
Long-term debt, less current maturities     795,426       177,169  
Total other liabilities     217,834       99,315  
Total shareholders' equity     304,107       289,938  
Total liabilities and shareholders' equity  $   1,455,841   $   627,151  


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(in thousands, except per share amounts)

  Three Months Ended Six Months Ended
  June 30, June 30,
    2016     2015     2016     2015  
         
Operating revenues $   130,309   $   85,701   $   222,880   $   169,989  
         
Cost of goods and services   50,296     30,280     82,057     60,970  
Selling, general, and administrative   33,694     18,606     55,120     36,718  
Integration and acquisition expenses   20,054     402     20,386     1,024  
Depreciation and amortization   32,415     17,663     50,154     34,001  
Total operating expenses     136,459       66,951       207,717       132,713  
Operating income (loss)     (6,150 )     18,750       15,163       37,276  
         
Other income (expense):        
Interest expense   (5,904 )   (1,940 )   (7,524 )   (3,855 )
Gain on investments, net     21       98       109     200  
Non-operating income, net   146     442     614     874  
Income (loss) before taxes     (11,887 )     17,350       8,362       34,495  
         
Income tax expense (benefit)     (4,892 )     6,876       1,477       13,735  
Net income (loss) $   (6,995 ) $   10,474   $   6,885   $   20,760  
         
         
Earnings (loss) per share:        
Basic $   (0.14 ) $   0.22   $   0.14   $   0.43  
Diluted $   (0.14 ) $   0.21   $   0.14   $   0.42  
         
Weighted average shares outstanding, basic   48,830     48,380     48,696     48,343  
Weighted average shares outstanding, diluted   48,830     49,004     49,415     48,927  


Non-GAAP Financial Measure

In managing our business and assessing our financial performance, management supplements the information provided by financial statement measures prepared in accordance with GAAP with adjusted OIBDA and continuing OIBDA, which are considered “non-GAAP financial measures” under SEC rules.

Adjusted OIBDA is defined by us as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of:  certain non-recurring transactions; impairment of assets; gains and losses on asset sales; straight-line adjustments for the waived management fee; amortization of the affiliate expansion asset; and share-based compensation expense.  Adjusted OIBDA should not be construed as an alternative to operating income as determined in accordance with GAAP as a measure of operating performance.  Continuing OIBDA is defined by us as adjusted OIBDA, less the benefit received from the waived management fee by Sprint over the next approximate six years.

In a capital-intensive industry such as telecommunications, management believes that adjusted OIBDA and continuing OIBDA and the associated percentage margin calculations are meaningful measures of our operating performance.  We use adjusted OIBDA and continuing OIBDA as supplemental performance measures because management believes they facilitate comparisons of our operating performance from period to period and comparisons of our operating performance to that of other companies by excluding potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the other items described above for which additional adjustments were made.  In the future, management expects that the Company may again report adjusted OIBDA and continuing OIBDA excluding these items and may incur expenses similar to these excluded items.  Accordingly, the exclusion of these and other similar items from our non-GAAP presentation should not be interpreted as implying these items are non-recurring, infrequent or unusual.

While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the current period allocation of costs associated with long-lived assets acquired or constructed in prior periods, and accordingly may obscure underlying operating trends for some purposes.  By isolating the effects of these expenses and other items that vary from period to period without any correlation to our underlying performance, or that vary widely among similar companies, management believes adjusted OIBDA and continuing OIBDA facilitates internal comparisons of our historical operating performance, which are used by management for business planning purposes, and also facilitates comparisons of our performance relative to that of our competitors.  In addition, we believe that adjusted OIBDA and continuing OIBDA and similar measures are widely used by investors and financial analysts as measures of our financial performance over time, and to compare our financial performance with that of other companies in our industry.

Adjusted OIBDA and continuing OIBDA have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.  These limitations include the following:

  • they do not reflect capital expenditures;
  • many of the assets being depreciated and amortized will have to be replaced in the future and adjusted OIBDA and continuing OIBDA do not reflect cash requirements for such replacements;
  • they do not reflect costs associated with share-based awards exchanged for employee services;
  • they do not reflect interest expense necessary to service interest or principal payments on indebtedness;
  • they do not reflect gains, losses or dividends on investments;
  • they do not reflect expenses incurred for the payment of income taxes; and
  • other companies, including companies in our industry, may calculate adjusted OIBDA and continuing OIBDA differently than we do, limiting its usefulness as a comparative measure.

In light of these limitations, management considers adjusted OIBDA and continuing OIBDA as a financial performance measure that supplements but does not replace the information reflected in our GAAP results.

The following table shows adjusted OIBDA for the three and six months ended June 30, 2016 and 2015:

  Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
    2016     2015     2016     2015  
Adjusted OIBDA $   55,905   $   37,641   $   96,271   $   73,960  
Continuing OIBDA $   49,810   $   37,641   $   90,176   $   73,960  


The following table reconciles adjusted OIBDA and continuing OIBDA to operating income (loss), which we consider to be the most directly comparable GAAP financial measure, for the three and six months ended June 30, 2016 and 2015:

Consolidated:        
(in thousands) Three Months Ended Six Months Ended
  June 30, June 30,
    2016     2015     2016     2015  
Operating income (loss) $   (6,150 ) $   18,750   $   15,163   $   37,276  
Plus depreciation and amortization     32,415       17,663     50,154     34,001  
Plus (gain) loss on asset sales     (48 )     218     (63 )   229  
Plus share based compensation expense     959       608     1,956     1,430  
Plus temporary back office costs to support the billing operations through migration (1)   2,339     -     2,339     -  
Plus integration and acquisition related expenses (1)   20,054     402     20,386     1,024  
Plus straight line adjustment to reduce management fee waiver (2)   3,046     -     3,046     -  
Plus amortization of intangible netted in revenue (3)   3,290     -     3,290     -  
Adjusted OIBDA $   55,905   $   37,641   $   96,271   $   73,960  
Less waived management fee (2)   (6,095 )   -     (6,095 )   -  
Continuing OIBDA $   49,810   $   37,641   $   90,176   $   73,960  


The following tables reconcile adjusted OIBDA and continuing OIBDA to operating income by major segment for the three and six months ended June 30, 2016 and 2015:

Wireless Segment: Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
    2016     2015     2016     2015  
Operating income $   7,277   $   19,270   $   27,209   $   38,708  
Plus depreciation and amortization   23,495       8,612     31,988     16,444  
Plus loss on asset sales   (53 )     8     (39 )   33  
Plus share based compensation expense   311       143     624     334  
Plus temporary back office costs to support the billing operations through migration (1)   2,339     -     2,339     -  
Plus integration and acquisition related expenses(1)   5,276     -     5,276     -  
Plus straight line adjustment to reduce management fee waiver (2)   3,046     -     3,046     -  
Plus amortization of intangible netted in revenue (3)   3,290     -     3,290     -  
Adjusted OIBDA $   44,981   $   28,033   $   73,733   $ 55,519  
Less waived management fee (2)   (6,095 )   -     (6,095 )   -  
Continuing OIBDA $   38,886   $ 28,033   $   67,638   $ 55,519  
         
Cable Segment:        
(in thousands) Three Months Ended Six Months Ended
  June 30, June 30,
    2016     2015     2016     2015  
         
Operating income (loss) $   1,164   $   (425 ) $   1,761   $   (1,102 )
Plus depreciation and amortization     5,879       5,859     11,974     11,338  
Plus (gain) on asset sales     (20 )     65     (34 )   52  
Plus share based compensation expense     294       217     602     504  
Adjusted OIBDA and Continuing OIBDA $   7,317   $   5,716   $   14,303   $   10,792  
                         
                         
Wireline Segment:                        
(in thousands) Three Months Ended Six Months Ended
  June 30, June 30,
    2016     2015     2016     2015  
                         
Operating income $ 5,180   $ 3,967   $ 10,278   $ 7,796  
Plus depreciation and amortization   2,933     3,083     5,967     6,007  
Plus loss on asset sales   40     125     40     134  
Plus share based compensation expense       136     106     284     246  
Adjusted OIBDA and Continuing OIBDA $ 8,289   $ 7,281   $ 16,569   $ 14,183  


(1) Integration and acquisition costs consist of severance accruals for short-term nTelos personnel to be separated as integration activities wind down, transaction related expenses, device costs to support the transition to Sprint billing platforms, and other transition costs to support the migration to Sprint back-office functions  
(2) As part of the Company’s amended affiliate agreement, Sprint agreed to waive the management fee, which is historically presented as a contra-revenue by the Company, for a period of approximately six years.  The impact of Sprint’s waiver of the management fee over the approximate six-year period is reflected as an increase in revenue, offset by the non-cash adjustment to recognize this impact on a straight-line basis over the contract term of approximately 14 years.  
(3) Pursuant to the intangible asset exchange with Sprint, the Company recognized an intangible asset for the affiliate contract expansion received.  Consistent with the presentation of related service fees charged by Sprint, the Company recognizes the amortization of this intangible as a contra-revenue over the contract term of approximately 14 years.

Supplemental Information

Subscriber Statistics

The following tables show selected operating statistics of the Wireless segment as of the dates shown:

   
June 30,		  
December 31,		    
June 30,		  
December 31,
  2016 2015   2015 2014
Retail PCS Subscribers – Postpaid         717,563 312,512   296,492 287,867
Retail PCS Subscribers - Prepaid                                 289,311 142,840   145,431 145,162
PCS Market POPS (000) (1) 5,536 2,433   2,421 2,415
PCS Covered POPS (000) (1) 4,528 2,224   2,213 2,207
CDMA Base Stations (sites) 1,425 552   546 537
Towers Owned 177 158   154 154
Non-affiliate cell site leases 211 202   202 198


The June 30, 2016 numbers shown above include the following amounts acquired in the nTelos acquisition:

Acquired PCS Subscribers – Postpaid 404,444
Acquired PCS Subscribers – Prepaid 154,944
Acquired PCS Market POPS (000) (1) 3,099
Acquired PCS Covered POPS (000) (1) 2,298
Acquired CDMA Base Stations (sites) (2)                     868
Towers 20
Non-affiliate Cell Site Leases 10
  Three Months Ended Six Months Ended
  June 30, June 30,
    2016     2015     2016     2015  
         
Gross PCS Subscriber Additions - Postpaid   26,185     17,734     43,541     34,839  
Net PCS Subscriber Additions (Losses) – Postpaid         (1,319 )   5,414     1,400     8,625  
Gross PCS Subscriber Additions – Prepaid   27,353     19,958     48,584     43,578  
Net PCS Subscriber Additions (Losses) - Prepaid   (6,912 )   (2,352 )   (7,213 )   269  
PCS Average Monthly Retail Churn % - Postpaid (3)   1.56 %   1.40 %   1.56 %   1.50 %
PCS Average Monthly Retail Churn % - Prepaid (3)   4.74 %   5.07 %   4.90 %   4.92 %