ATN International (NASDAQ:ATNI) Q2 2020 Earnings Call

0:00 Good afternoon, ladies and gentlemen, and welcome to the ATN International Q2 2020's earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your test tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Justin Benincasa, Chief Financial Officer. Please go ahead, sir. Thank you, operator. Good morning, everyone, and thank you for joining us on today's call to review our second quarter 2020 results. With me here is Michael Prior, ATN's Chief Executive Officer.

0:47 During the call, I'll cover the relevant financial information, and Michael will provide an update on the business and outlook. Before I turn the call over to Michael, For his comments, I'd like to point out that the call and our press release contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures, and for further information regarding the factors that may affect our operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the FCC. I'd also like to note that we are in a quiet period with respect to certain FCC-related auctions, and as such, will not be in a position to answer any questions related to ongoing FCC auctions.

1:56 And with that, I'll turn the call over to Michael. Thank you, Justin. Extra disclaimers this quarter. Always fun. So second quarter results show that ATN is fairly well positioned for weather this ongoing health crisis. But, of course, we are conscious of the personal and economic toll It is taking on our country and on the communities we serve. Back to quarterly performance, it was really quite good. We've seen demand for communication services remain strong, particularly and not surprisingly, from home users of high-speed internet. And we're well positioned to meet that demand. Our extensive investments in recent years have given us the capacity and reliability that is critical to support our customers and communities.

2:49 This is about much more than network investment, however. Our ability to succeed amidst difficult operating circumstances is due in large part to a sense of urgency and a can-do attitude on the part of our operating teams. They adapted remarkably well and are continuing to deliver for our customers. Looking forward, we think there is more we can do to improve our operating efficiency, meet demand, and win share. We are not waiting for this situation to resolve. We are moving forward in the new environment. I should note that we are well aware that things could get worse, particularly in terms of local economies where our businesses are located.

3:34 We are preparing for that likelihood and will further adjust our operations and spending as necessary. And now let me turn to our individual operating segments, starting with International Telecom. Segment revenue for the second quarter here was relatively flat year on year, but we reported a significant increase in EBITDA and operating income. Both trends, I think, reflect some pandemic impacts. The pandemic caused some downward pressure on mobile revenues, particularly prepaid revenue and overages and roaming. Also, we experienced lower revenue due to travel restrictions in multiple markets. Offsetting those factors was very high demand for home broadband, as I already noted, as well as for cloud services and connectivity solutions to enable remote working for business customers.

4:29 On the expense side, the pandemic reduced sales, marketing, travel, and roaming costs, and we took additional measures to reduce spending. We will continue that vigilance. Looking at subscriber numbers, fixed data subscribers rose by more than 10%. year-over-year, a somewhat faster rate than previous quarters, consistent with the pandemic-induced increase in demand. Mobile subscribers dropped, largely reflecting lower-end prepaid losses. We think this is roughly equal parts pandemic-related and losses to competition. Video subscribers declined at an 8% annual rate, an uptick in linear videos In our first quarter call we said that we were concerned about the negative impact of lower tourism activity in many of the markets we serve.

5:39 In the second quarter, we saw some signs of that in some hotels and restaurants and other tourism-driven businesses shut down and cut services. However, the impact on our overall business was relatively minor. Sitting here today, I think it is likely the next couple quarters will be worse in that respect if there is no resumption expected soon on tourist visits. But we've handled downtrends before, including the financial crisis and recessions that impacted tourism in these markets. This one may bring new challenges. So we'll continue to be cautious on spending, and we'll look for ways to enhance free cash flow as part of our contingency planning.

6:24 As Justin will discuss, we expect capital spending for this segment to be below our initial full-year forecast. though we are continuing to invest in our networks and services. As discussed last quarter, we are also actively working to adapt the business in other ways and to develop service offerings and capabilities that help our customers manage through this environment. We made a lot of progress in the past few months with digitizing our customer and employee interactions, and there's more of that that can be done. Moving to the U.S. telecom segment, There's another good quarter here as well. While the year-on-year comparisons are not likely to be as favorable over the second half of the year, we expect continued consistent performance on a consecutive quarter basis.

7:14 The driver for that consistency is longer-term carrier service contracts and government subsidy programs like CAF II. And we have also seen steady and increasing demand for our retail offerings particularly the rural broadband services we have deployed as part of the CAF2 program. This segment is less sensitive overall to coronavirus-related pressure than our international telecom segment, although the pandemic did cause delays in our first net build, as we've noted, and there is of course some risk of more significant impacts if the environment worsens. Furthermore, while we do not currently see a great deal of downward pressure, The pandemic has curtailed certain operations and sales activities, making it harder to complete large initiatives or grow customers and revenue.

8:09 Our teams have been doing a great job coping with the restrictions and the changes, but it certainly slows us down. In renewable energy, Our operations were negatively affected by pandemic restrictions as some large industrial customers were forced to close factories and mills due to government restrictions in India. Those customers renewed operations once they made changes to their facilities and processes, and the revenues have recently returned to normal. So moving back to ATN as a whole, I wanted to take the moment to add some comments about our people. Our business leaders and their teams across all of our operating subsidiaries and supporting operations at the parent level really stepped up in a very tough environment.

8:59 They found ways to enhance services for customers with changing needs by increasing data speeds to many homes without charge and by extending grace periods for payment. They moved quickly to add additional resiliency and capacity to our network. They distributed temporary home broadband solutions using our mobile networks and capabilities. They helped businesses move to a remote work environment, and they worked with governments to help deliver health monitoring and movement solutions. And one specific example of these heroics, among many, that stands out to me was the effort to rapidly deploy new fixed wireless broadband nodes and Wi-Fi hotspots across some underserved areas of the Navajo Nation.

9:44 to support students working from home in that hard-hit community. This resulted in the upgrade of over 50 sites and more than a doubling of speed and capacity of the existing network, supporting a 50% increase in traffic. Our engineers and others worked tirelessly to get that done, and in great collective spirit, we also were assisted in that effort through temporary spectrum license grants from some national carriers. In turn, we helped other carriers with temporary grants to use Spectrum in places outside of our main service area. And it went beyond customers. There was great work to support our employees and great work in turn by them in adapting to the changed environment. Our IT folks were able to securely and effectively enable remote operations and collaboration.

10:34 Our customer care group maintained crucial support while at the same time relocating people and systems. Our financial and operational staff ran through rapid resiliency assessments and took measures to further strengthen our position. It was really great stuff, and fellow investors in ATN should be grateful. Of course, the work does continue. We've learned to do many things well, but there are some areas of challenge. In particular, it is harder to win new customers, I mentioned before, and it's harder to launch new strategic initiatives or relationships. But it is by no means impossible, and our ambition for growing shareholder value is as great now as it was before the pandemic.

11:20 So to summarize, we executed well in a difficult environment. Our telecom services are in demand in both our international and our domestic markets. We are concerned about the effect of the pandemic on the economic well-being of our markets, particularly the island economies, given their dependence on travel and tourism. That said, we have the people and financial resources to manage through this difficult period and potentially find opportunities to extend our platform. And that's it for me, Justin. Back to you. Thank you, Michael. Just to cover some of the financial numbers. For the second quarter, total consolidated revenues were up slightly over last year at $109.1 million, and consolidated EBITDA was $29 million of 19% over the second quarter of 2019.

12:13 Consistent with the first quarter, the recovery of our U.S. telecom segment and increased demand for our fixed services and cost savings in the international segment were the primary contributors to the strong year-on-year EBITDA comparisons. Looking at each of the segments and starting with International Telecom, revenues were 80.1 million, up slightly from 79.9 million last year, and EBIT increased 17% to 28.7 million. As Michael noted, the strong EBIT performance reflected a change in our revenue mix with increased demand for our broadband services and cost reductions across several expense categories. As we noted in the release, approximately $1 million of the savings were one-time in nature and unrelated to the overall operating cost reductions we saw in the quarter.

13:08 International telecom segment capital expenditures in the quarter totaled $9.4 million and $19.9 million year-to-date. We now expect the segment's full-year CapEx to be between $35 and $40 million, approximately $10 million below our original forecast, due to project deferrals and delays, and we'll continue to monitor any potential project delays as we move through the year. In the U.S. telecom segment, revenues were $28.2 million for the quarter, up from $26.4 million a year ago, and EBITDA was $7.5 million, up from $7.1 million in the second quarter of 2019. Similar to the first quarter, and as Michael noted, these increases were primarily from the CAF II federal support revenue that began midway in the second quarter of 2019, and increases in carrier service revenue as part of the FirstNet transaction.

14:07 Michael mentioned this as well, but I'll just note it again. We talked about our first quarter call. We expect very little seasonality in revenue in EVAs this year compared to past years based on the terms of our carrier contracts. This will be most visible in our third quarter comparisons as Q3 2019 was the highest seasonal revenue quarter last year. With respect to site construction and related revenue under the FirstNet agreement, the overall timing has been pushed out due to permitting and construction delays caused by the pandemic. We currently expect construction revenues to begin in late 2020, but this could be further delayed by the current coronavirus resurgence in parts of the country. As we previously mentioned, the delays in construction revenue should have little impact on operating income as revenues will be largely offset by construction expenses.

15:02 The segment's capital expenditures in the quarter totaled $6.9 million and $8.9 million year-to-date. Similar to the international telecom segment, we expect capital expenditures in U.S. telecom to be lower than what we originally forecasted. We now expect to spend approximately 25 to 30 million versus the original 35 to 40 million with approximately 10 million versus 20 million of that on towers and back halls to support the first net build out. In renewable energy segment, revenues were 900,000 in the second quarter compared to 1.4 million last year, and EBITDA was a negative 134,000 compared to a positive 805,000 last year. As we noted in the relief, pandemic-related restrictions resulted in some of our customers having to shut down operations in the second quarter.

15:58 As of today, most of those operations are back to normal. We had consolidated net income for the quarter of 4.7 million, or 30 cents a share, and this includes a 2.3 million tax benefit in the quarter. We now anticipate an overall effective tax rate of approximately 5% for the year, as we expect a benefit from NLL carryback as part of the CARES Act. Also included in operating expense is a quarter of $1.6 million of non-cash stock-based compensation expense and $1.8 million of costs related to early-stage initiatives in the U.S. telecom segment. Just quickly on the balance sheet, we had total cash and short-term cash investments of $126 million and total debt outstanding of $84.6 million.

16:50 And with that, operator, we'd like to open the call up for questions. Ladies and gentlemen, if you have a question at this time, please press the star to the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Rick Prentice with Raven James. Please go ahead. Thanks. Good morning, guys. Good morning, Rick. I hope thoughts are with everybody out there, families, employees, yourselves in this COVID-19 world. So glad to hear things are doing well and you're helping the whole situation. We agree. Thank you.

17:36 One quick one. It looks like maybe the and many more. Yeah, I think we did correct the original one on that, but I'll find out where that went. I thought we filed it, Rick, already. But let me check on that. I thought it was out there. Okay, yeah, just because it looked like our two few numbers weren't matching up. But yeah, if you could just check on that, that'd be great. More importantly, Michael, and I apologize, that was on an earnings call that went long, but in the prepared or in the press release, You talked about a concern about the economic impact that long delays in a return to tourism and travel could affect your international markets.

18:36 When would you typically see that? Because to be blunt, in 2Q you came in quite strong. Things were better than we had thought they would be. So as you think about a potential concern on travel and tourism, what kind of seasonality or quarter should we think that might manifest itself? Well, you know, in our markets they have different heights. and others. We have more southerly latitude. Caribbean markets are more concentrated in the winter and early spring, so mostly first quarter, a little second and a little fourth. And then a place like Bermuda, it's actually between second Second and third quarters is most of it, and so some of that would have been already.

19:36 And the different economies have different impacts from tourism. All the island economies, as I said, have some real impacts from tourism, but it's more significant in a place like the U.S. Virgin Islands, which doesn't have the same financial service and other side of the economy to the extent Vermeer came in. So what has happened so far, though, is businesses do have some short-term resilience and some ability to adapt and wait, and in some cases, particularly in the U.S. markets, including U.S. territories, the federal government, of course, helped bridge that. So just the concern is that if it extends and if they're looking forward to a prolonged period where they won't see the traffic, then they may make further adjustments down to their business, reducing jobs, reducing their own purchasing and economic activity. And so there can be a ripple effect.

20:46 And we did see, as I noted in my comments, we did see aspects of this in the financial and the recession that followed. It took a period of time. It didn't take things to zero by any means, but it had an impact. One other quick one. Justin, you mentioned a one-time $1 million benefit. What was that related to? I would call them like either one-time credits. We got a power credit, for example. It was one of them. And somewhere they resolved a few disputes that we had outstanding. So they're just not going to be recurring, so I wanted to point them out. Okay. And, Rick, just to follow up on the – we filed an AKA on June 8th with correcting those 2019 quarters.

21:42 Okay. All right, we'll double check all those inputs. And then for quite a while, obviously, you guys have been making some investment into new businesses, always with the illusion that at some point you'll be able to share with us some more thoughts. COVID-19 maybe has changed some of the timelines, but how are those businesses doing? What was the burn rate in the quarter? And when do you think we'll be able to get some more insight into what the opportunity set might be for those new businesses? Yeah, I'll cover that. The burn rate was 1.8 million on those companies, which is just slightly up, call it a couple hundred thousand over a year ago. And I'll let Michael talk about kind of status.

22:27 Yeah, I think in terms of the ones that run through the top part of our income statement, I think you saw, you could see in the segment information that our managed services investment is picking up steam and doing well, and I think it has definitely more room to run, quite a bit more room to run. And it was timely, really, for the pandemic and the demands of our commercial and government customers. So that's positive. On the other side of this sort of consolidated piece, of those kinds of businesses. You have the in-building business at Geoverse.

23:12 It's still early for what we are trying to do, which is not, you know, DAS. It's a true active neutral host environment for the next generation. So, you know, as a whole, it's still early. We are, you know, we are getting momentum. We are, you know, getting places to build out. That was slowed a bit. by the pandemic. Sales activity was slowed and owners of real estate have obviously paused, particularly in some of the sectors hardest hit like hospitality and commercial. But we're still very invested in that and believe the opportunity is significant.

23:57 And we've seen things too, like the commercial customers coming to us for solutions using our connectivity platform as a way to do tracking and things like that to enable safer usage of facilities. So we're very positive there, but early. And then on the balance sheet side of it, two-thirds of that number is really represented by our investment in Australian Tower Co. and neutral host provider. And that initially got off to a little bit of a slow start, but it is also picking up very positive momentum lately, you know, winning build suits and pursuing larger opportunities.

24:47 So we feel pretty good about it, but, you know, I guess that's probably all in there. I hope you guys stay well. All right, thanks, and you too. And your next question comes from the line of Greg Burns with Sidoti and Company. Please go ahead, sir. Good morning. I've had a couple of follow-ups pertaining to GeoFirst and just hoping to better understand that business and the opportunity there. So can you just talk about why an enterprise or a building operator or maybe a construction company might want to deploy this type of service as opposed to maybe just using Wi-Fi or some other connectivity? What is the benefit of a Geoverse private LTE type service over other solutions?

25:44 Sure. The deployment is utilizing some of the technologies that are coming around 5G So that means you can deliver many more connected devices at one time, lower latency when compared to Wi-Fi. The other thing when you compare it to Wi-Fi is it's a much more secure, it's a carrier grade, carrier class protocol which is inherently much more secure than the Wi-Fi environment. And then the last part is it also integrates with connectivity to the macrocellular environment, right, so in-building coverage.

26:31 So it's really a combination of all that and being able to put out, you know, a much more robust and secure platform to take advantage of What we're increasingly seeing is people really building solutions for that. And we think those solutions are going to run over that type of platform increasingly rather than Wi-Fi. Okay. And then can you just help me understand how Geoverse deploys the service? What's the model there? Are they building out infrastructure or is it a site-by-site? Kass, and from a customer's perspective, how does the economic model work? Is there an upfront capital expenditure and a recurring service?

27:19 Is it all bundled? Can you just maybe talk about that a little bit? Sure, I can talk about it a little bit, but let me caveat it to say that in terms of particularly the last part, in terms of the economic models, I would say it's early innings, and I think that will evolve, so I don't think we can speak with certainty as to the way it will work. What we feel strong about is there's a value proposition and we understand that building owners and tenants understand that value proposition and increasingly are looking at it. So that's sort of my answer in a pricing model. The first part, we are doing two things really.

28:04 One of the key things we provide which we call the Geocor is a network platform that makes all the connectivity work. And that, we have some cases where we are partnering with folks who have the ability and want to deploy the fixed infrastructure on site, but they want to connect it and have our platform basically operate, have us operate the network platform and connect it to other providers and devices and so on. So we call that network as a service, and I think there's a lot of interest in that and there's a lot of discussion about that.

28:54 But we're also doing and have done build-outs where we're happy to build it out ourselves, soup to nuts, a turnkey, for a customer, basically a completely connected environment where we build out the wireless nodes and connect them to that platform. So both, we're open to both, and for some partners, they want to own that. They may have a lower cost of capital and they want to invest in that, and for others, they would just assume we do all that. Okay, and I guess it's kind of like the pandemic has maybe slowed the ability to sell some of these newer solutions. But, you know, is there a point where, you know, maybe more investment will be required? Or, you know, how should we think about the investment requirements of, you know, an early-stage startup business like this that maybe starts to gain some traction? Like at what point might you – need to commit more capital to this business?

30:05 Success. I think success drives that, right? It's not that there's no preparation capital. We've already invested significant capital in developing the capabilities of the product, the technical capabilities, developing strategic relationships and customer relationships and things like that. But success is really going to be the main driver. contracts to connect to either, you know, either on the NAS front or build. And, of course, the build side, if we're doing more, you know, complete turnkey, complete network delivery, that will require more capital. But we think that is not – we are not concerned about that.

30:51 We think that would be a nice situation because we think we would have – Plenty of access to lower cost of capital to do that. So I think, you know, just follow the news. I think the industry generally, not just us, bigger, you know, the sort of larger momentum and builds I think are most likely in 2021 and beyond. It could pick up a little steam in 2020, but we're still in somewhat of a restricted environment, and we're still early on some of the technology adoption. Great. Thank you.

31:37 Yep. And your next question comes from the line of Alan Klee with National SEC Corp. Please go ahead. Yes, hi. My apologies because I joined late if this was asked. But just think you could clarify two little financial things. On the cash flow statement, what was the purchase of intangible assets and strategic investments under cash flow from investments? And then also you were repurchasing some of your non-controlling interest of close to $4 million. Could you just explain those two items? Thank you. The latter one is actually subsidiaries. Yes, our subs buying back some of their own stock.

32:25 Right, so a minority. Yeah, and the first one, Alan, unfortunately I've got to tell you we're subject to confidentiality restrictions on that, and we'll hope to share further information next quarter. Okay, thank you. And again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1. And your next question is from the line of Hamid Khourtson with BWS Financial. Please go ahead. Hi. So first question I have was related to your comments around the international segment.

33:10 Are you seeing actual disconnects related to the hospitality right now, or... Is this just a warning of what could happen if this is a prolonged kind of a tourist depression? Both, I think, really. We did see some. I mean, most of the, we would say the stratas of the condominium complex of hospitality, there are, you know, did disconnect. Some of those are not as high a profit margin as our residential customers, but we did see some in the quarter. Do you have any comment into the situation that's going on in Guyana, and does that affect any of your business right now in the political realm of what's going on?

33:57 Yeah. You know, it feels like more craziness politically in a lot of places, but it's just an unfortunate situation there. There's been... I think we talked about it last quarter, but there's been contested issues around the election and the U.S. and the U.K. government and others have questioned it and spoken out quite forcefully about it. And, you know, the government there has its own position in response to it. So it's definitely, I would say it's inhibited some of the You know, really that and the pandemic and to some extent, you know, the severe oil pipe price change in the first quarter. But I would put that as the smallest of factors.

34:58 And, you know, it definitely inhibited the sort of more rapid ramp up of investment and economic activity in Guyana. We expect it. And I'll add, I still expect it, I think. It will come. It's just hard to look at the math and not see it coming. Have you changed any of your business strategy in Guyana for the last quarter and I think the last couple of quarters, actually? You guys have been talking about trying to re-strategize the go-to-market strategy as far as getting new subscribers and growing the mobile market there. We have. We're working on that. We're not performing the way we want to in that piece of business. In other areas, You know, we've done quite well.

35:44 But towards that thing, I think we've made some moves that will be helpful. We expect to be helpful. Time will tell. And there's more we're working on. But, you know, I hate to promise too much there. You know, my view is let's see it. Let's see actual objective gains. So, you know, that's hopefully to come. And lastly, given the delays in construction, do you think you'll have any towers in the U.S. for the FirstNet network up any time in the second half of the year? I think we're going to – we'll have some up later in the year, yes.

36:30 Okay. So we definitely will. So we're probably a couple quarters behind where we thought we'd be. You would generate some sort of revenue from that beyond just the construction, correct? We would, we would, but in the short, in the meantime, we collect wholesale, roaming revenues on it. So it doesn't necessarily lead to additional revenue once we flip the power over. Okay, understood. Thank you. And we have a follow-up question from the line of Rick Prentice with Raymond James. Please go ahead. Thanks. Had my first call to end early so far today, but wanted to wonder, what's the M&A environment out there looking like?

37:17 You guys obviously have a large cash balance. COVID-19 kind of whacked us all in the face, but have investors, have sellers changed their opinion, or is there opportunities out there? What's the M&A world looking like? I think it's early in terms of sellers really changing, except, you know, in some businesses that are in real distress. And some of those are not attractive to us either. But the other thing that's still happening, I still see a fair amount of low cost of capital, you know, infra-co, infra-fund type money active in the market that we like and the types of business models we like.

38:08 So we're increasingly talking to some of those folks and trying to figure out how we work together because I think there's opportunity for us to be a real value-added operating and investment partner there. So I think that will take a little time, but but that's really where the environment is. There's not been some significant reset of value down that I've seen and in some cases maybe in the opposite direction because of flight to safety. Okay, then also FCC has an upcoming auction in the Rural Digital Opportunity Fund.

38:53 We won't talk spectrum since you can't talk that side of it but what are your thoughts about that with the RDoS or Rudolf Spann, however you want to pronounce it, opportunities might be. Yeah, I don't think, Rick, I don't think we can talk about that either other than to say we're registered. And what's the timeline? Is that still October for the auction to start? We probably could talk to that, though. I believe so. That's the last I heard was, you know, things have been moving on a couple fronts, but that's If my latest understanding is correct, then that's right. Okay. All right. Very good. Thanks, guys. Yeah. And I'm showing no further questions at this time.

39:38 I would like to turn the call back to management for closer remarks. All right. Thank you, Operator, and thanks, everybody. Appreciate the well wishes, and we extend them to all of you. Thanks. Take care, everyone. This concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.