ATN International (NASDAQ:ATNI) Q4 2019 Earnings Call

0:00 Good afternoon, ladies and gentlemen, and welcome to the ATN International Fourth Quarter 2019 Earnings Conference Call and Webcast. At this time, all participants are in 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 zero on your touchtone telephone. As a reminder, this conference call might be recorded. I would now like to turn the conference over to your host, Mr. Justin Denincasa, Chief Financial Officer, sir. Thank you, May. Good morning, everyone, and thank you for joining us on our call to review our fourth quarter and full year 2019 results. As usual with me here is Michael Prior, ATN's Chief Executive Officer, and I will, during this call, I'll be covering the relevant financial information, and Michael will provide an update on the business and outlook.

0:54 Before I turn the call over to Michael for his comments, I'd like to point out that this 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 gap measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8K filing provided to the SEC. And with that, I'll turn the call over to Michael for his comments.

1:44 All right. Thanks, Justin. Good morning, everyone. Well, our operating units continued the positive performance of the third quarter, and as a result, the second half of 2019 was a major improvement over the first half, and we expect these tailwinds to carry over into 2020. International Telecom posted another solid revenue increase and even stronger EBITDA growth, and we believe there is room for improvement in competitive performance. U.S. Telecom was a very similar story to the third quarter as more progress was made on solidifying wholesale revenues while we work on developing growth opportunities in other areas. Unfortunately, this progress was not reflected in our reported earnings per share.

2:33 Based on market developments and the year-end review, we concluded that we needed to write off the goodwill of our India renewable energy business Thank you. Thank you. As I said, our largest segment continues to perform well. Revenue and EBITDA were up both year-on-year and on a consecutive quarter basis. We are reaping the advantages of the substantial network investments from previous years, particularly in fixed data services for consumers and businesses.

3:25 Operating margins are getting stronger, and capital expenditures for the segment were $120 million lower for 2019 than 2018 for an annual capital intensity of about 13% for this segment. While planned and expected, the benefit to free cash flow was important, and outside of opportunistic growth investments, we would expect 2020 to follow suit. The acquisitions we made in 2016 and the investments that followed have added valuable scale to the segment, which we can see in the operating margin Margin, and save for the rather large hiccup of the 2017 hurricanes, they're also producing the cash flows we expected.

4:10 Where we've had less success is in growing mobile revenue and subscribers. For the quarter, we ended up with roughly 284,000 mobile subs, which is down from about 300,000 a year ago. And while this had a negligible impact on wireless revenue as the losses were mostly in the low end of ARPU subs, We are determined to reverse that trend this year. And video subs, as in many markets, continued to decline about 8% year-on-year, as did voice subscribers, though at a lower rate. Data subscribers, of course, were the key here and ended the quarter and the year just shy of 130,000, which represents an increase of roughly 8% year-on-year.

4:57 Looking forward, while we have room to continue to grow data subscribers and broadband households, we think the larger opportunity is in enterprise data services, where we see potential in multiple markets. Moving to U.S. telecom, boy, first thing to notice is what a difference a half year makes. While not as good as the unusually strong third quarter, which benefited from seasonal factors, Results for this segment this quarter were well above results from the fourth quarter 2018 and the quarterly performance from the first half of 2019. And we have a lot going on in this segment. We are working hard on the large and complex requirements of our piece of the first net build-out, and we are continuing to focus attention on growth initiatives both in and outside of wholesale.

5:47 We've touched on most of these before, but they include enterprise, high-speed data services, neutral host opportunities in our traditional rural operating areas, and private LTE solutions elsewhere. Broadly speaking, I would divide these opportunities into those that are focused on building networks and providing services to wholesale and retail customers in rural areas, and those that are focused on the in-building or enterprise on-site market for secure carrier class wireless connectivity. In some cases, we're more in a build and position mode and in others, we are in a straightforward customer acquisition mode. We will look to provide more detail as these things develop over the course of 2020.

6:33 And with respect to private LTE, I know we've had questions from investors about that, so to just give a little more color, We are going after this through our Geoverse subsidiary, and Geoverse has begun deploying into several verticals and is also partnering with multiple players interested in taking advantage of its network layer solution. What we see is the next stage of industry development of in-building and enterprise solutions is still early in its development. but we and many other participants expect things to move fairly quickly in 2020 and certainly 2021 with the advancement of the CBRS and 5G technology ecosystems and as building owners and occupants realize there is a much more powerful, secure, and reliable solution than Wi-Fi available.

7:26 In renewable energy, while the revenue was relatively immaterial on a consolidated basis, The team was busy pursuing two large builds for top-tier corporate off-takers, and we hope these activities lead to a larger contribution as we get deeper into 2020. And as noted in our press release, we have invested approximately $32 million over the past three years in four early-stage companies with telecom technology or services business models. In rough order of investment size, these include an international communications tower and neutral host company, two wireless technology companies, and a developer of a new satellite antenna technology.

8:14 While these companies feature still in relatively early stages of development, we are optimistic about creating shareholder value here, both through financial returns and through the contribution in some cases of technologies or solutions that leads to other business success at ATM. We've also made controlling investments in several other businesses, including a private LTE and building company, a managed and cloud services business, and a long-haul fiber initiative. The managed services business, FireMinds, is growing nicely for a young company and is contributing to the product set of both our international and U.S. telecom businesses. The fiber business is in protracted discussions with customers in what unsurprisingly is proving to be a long sales cycle business.

9:04 The in-building company, Geoverse, which I just discussed, has developed a strong solution and positive momentum. So to summarize for the quarter, I think the key takeaways are while operating income and net income were negatively impacted by some impairments and other losses related to certain of our minority and overseas investments, Our largest businesses performed well, and we were able to continue the positive momentum in our telecom segments through year end. And our visibility is quite a bit better today than it was a year ago. We like where these businesses are right now, and we expect continued positive comparisons as we move into 2020. and with that, I'll hand it back to you, Justin. Great, thank you, Michael. Just to get into some of the relevant financial data, for the fourth quarter, total consolidated reported revenues were 112.1 million, up 4% from last year's reported total of 107.8 million.

10:02 Adjusting for the sale of the U.S. solar portfolio completed in late 2018, revenue increased 7% from last year. Throughout the year, We consistently reported steady revenue growth and improving profits from the international telecom segment. The U.S. telecom segment also showed significant improvement this quarter over last year, and its revenue and EBITDA performance in the second half of the year was up 27% and 140%, respectively, from the first half of 2019. This reflects the benefits from the CAF II Federal Support Award that we won in 2018 and increased wholesale revenue as part of the first net transaction. Consolidated adjusted EBITDA for the quarter was $28.5 million, an increase of 22% over 2018 adjusted EBITDA of $23.4 million.

10:57 Adjusting for the sale of the U.S. solar portfolio, adjusted EBITDA increased 39% year on year. Looking at the segments and starting with the International Telecom, starting with International Telecom, fourth quarter revenues were up 6% to $83.1 million from $78 million last year. And adjusted EBITDA increased 29% to $26.6 million from $20.6 million. As Michael mentioned in his comments, much of the year-on-year growth comes from post-hurricane recovery in the U.S. Virgin Islands and continued high-speed data subscriber and revenue growth. in the markets where we've made investments in upgrading and expanding our fiber networks. Capital expenditures in the segment totaled 42 million for the full year, coming in lower than the 50 million we expected as timing of some of the spend has pushed forward into 2020. We reduced capital expenditures by 118 million in 2019, which represents a substantial free cash flow improvement for the segment, which is one of our main goals for the year.

12:06 For 2020, we expect capital expenditures to be similar to 2019 levels at 45 to 50 million. In the U.S. telecom segment, fourth quarter revenues totaled 27.8 million, up from 24.9 million a year ago. and adjusted EBITDA was $8.3 million, up 28% from $6.5 million in the fourth quarter 2018. While we had expected a small portion of the construction revenue from the first net agreement to start this quarter, the construction schedule was pushed out slightly. We now expect a small portion of the approximately $80 million of construction revenue to be reported in the first quarter of 2020 and continue through mid to late 2021.

12:53 I should note again, though, that this revenue will be offset by construction costs and therefore have a minimal impact on EBIT and operating income over the build period. Capital expenditures for the segment were $17.5 million for the full year 2019, slightly above our estimate. We were expecting higher capital expenditures in 20... We are expecting higher capital expenditures in 2020 for the segment at $35 to $40 million. which includes approximately 20 million for tower construction and building backhaul that we will own and lease back as part of the first net agreement. Year on year EBITDA for the quarter included approximately a half a million in additional operating costs associated with the early stage businesses.

13:42 In renewable energy segment, revenues were $1.2 million for the fourth quarter, down slightly from third quarter in the prior year after adjusting for the sale of the U.S. portfolio I mentioned earlier. Adjusted EBITDA was $146,000 for the quarter. We reported consolidated net loss for the quarter of $9.8 million, or $0.61 per share. Included in the loss of the quarter was $5.8 million of goodwill impairment charges and a loss on disposed assets from our India solar operations, given the changing market conditions and related delays in execution. Other expenses of $1.8 million included approximately $3 million of currency losses in the quarter. The majority of these losses are from the currency devaluation of our 2017 investment in the Australian Tower Company.

14:37 In addition to our initial 2017 investment, we recently made an additional investment in January that took our ownership above 20%, which will require us to change our accounting method to equity investment method in 2020. Our other income statement items to note, the effective tax rate for the year was 67%, reflecting a mix of We expect the tax rate to revert to more normal levels in 2020. Also included in operating results was $1.5 million of non-cash stock-based compensation expense for the quarter. Looking at the balance sheet, we ended the quarter with total cash and short-term investments of $162.8 million and total debt outstanding of $86.4 million.

15:35 And as we mentioned in the press release, cash from operating activities was down this year compared to last, primarily due to the $27 million tax payment we made this year on the 2018 gain on sale of our U.S. solar operation. And with that, operator will like to open the call up for questions. Ladies and gentlemen, if you have a question at this time, please press the star and then 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. First question is from the line of Rick Prentice, or sorry, Alan Clee from National Securities. Your line is now open.

16:23 Yes, hi. Hello. Hello. The first question is, when you were talking about the U.S. business, I thought I heard you say that maybe there wasn't construction revenue in the quarter related to FirstNet and that maybe you'd get some in the first quarter of 2020. Did I hear that right? Because then in the text I thought that... Yeah, we thought we might have some in this quarter, but the schedule's pushed out, so we'll have a small amount in the first quarter, 20, and then it will kind of ramp from there. So there is none in the fourth quarter. So all the gains in that segment really came, I mean, you have the cap, too, but what else would you point to for the benefits in the U.S.

17:19 business for the quarter? Just improving wholesale revenue. Okay. And then when you talked about some of the opportunities in that segment for 2020, you listed areas where you thought you could sell more within retail and wholesale. Could you maybe just expand a little bit into how that would work? Yeah, I think retail and enterprise, just to be clear, too. Yeah, yeah. I think there's also opportunities also, but that maybe takes a little longer. And the main issue, as Justin said, is retail and enterprise are the main focus.

18:07 And the main driver there is high-speed data services, whether it's fixed data, and a number of other people. and I think while we made some progress in 2019, we see an opportunity to improve upon that in 2020.

18:54 Would that suggest that outside of FirstNet and CAP2 that the segment overall might be more like stable in 2020 excluding those two things rather than being in decline? Yeah, I think so. I think that this definitely should – we expect some positive contribution from this initiative to the revenues for the segment, for sure. And I think we don't see major pull-downs from where we are today. There are some areas that will decline, puts and takes. So I think the short answer is that's fair to say.

19:46 Okay, I'll ask one more question. Just relating to the renewables business, I sort of heard two different things. One, a goodwill write-down, which implies the outlook is not quite as good, but then also that you're winning some or that you have some two new customers to add on. Is the way to think of the business now that this quarter's run rate is kind of reasonable for for the first half, and then maybe it modestly increases in the second half, but it's hard to know to what degree that could potentially increase. If you could add any color on that. Thank you. Sure, Alan. It's Michael. I don't think we're going to forecast.

20:34 We don't usually do that anyway, but I also think that the movements are not likely to be material to the company as a whole. I think What we're trying to say is there are some good developments and good reasons to expect some growth there. It takes time, right? So you land the customers, you build out, so it takes time for the revenue to follow the sort of customer acquisition success. And so that'll mute the near-term benefit. And The difference between that and the write-down is really a lot of our initial investments took too long to monetize, if you will.

21:24 That's really underlying what hurt that analysis and why we chose write-off. Okay, thank you. I'll get back in the queue. Sure. Your next question is from the line of Rick Prentice from Raymond and James. Your line is now open. Hey, guys. Sorry about the head fake. A couple of questions for you. First, I missed the number. Sorry, I've been busy earnings morning already. What was the impact of the early stage companies in the fourth quarter numbers? It was an additional half a million dollars over last year. and what was last year? Yeah, it's probably a million last year, so it's probably about a million and a half this year.

22:14 Okay. And then the FirstNet project, because we had been expecting a little bit in the fourth quarter for the construction side. You mentioned how it's pushed off and then it'd be small in one queue. What's led to that delay? Was it weather? Was it timing from AT&T FirstNet? Equipment? What kind of led to almost like a half-year delay maybe? I think it was just a combination of stuff, really. It's just, you know, sites work. It's just typical stuff, honestly. I would add it's a big overall program. And, you know, so there's that complexity to get that, you know, starting momentum both on our side and on the customer's side.

22:59 Gotcha. It's a big project. It takes a while to get the wheels running, and then once you do, it starts rolling. Any issue with permitting, zoning? We keep hearing, obviously, the FCC and others are trying to get small sales going in urban areas, but are we seeing pushback in any permitting and zoning in the FirstNet target area? In our areas, I think we feel pretty good about where we are there, but there's always some that are taking longer and others, it's not easy. You're right, that can be the long pole in the tent, but I don't think we have a particular concern there in our areas. We know them well and we know the process well.

23:47 Okay. I know I'm bouncing around a bit here, but in India, renewable energy is not telecom, but wow, the telecom, Department of Telecom and the telecom fees that are getting imposed and interest in India. Any concerns about, as a U.S.-based company operating in India? Because a lot of foreign companies are starting to get nervous about the telecom side of India. Yeah, I mean, I think India... is a very promising market and exciting market in a lot of ways, but there is a tendency to do right turns, left turns, sometimes even U-turns by government.

24:34 It just has a history of that. Not keeping a steady path that really encourages investment and really honestly lowers their Their cost of capital is the way I think of it. So I don't think it's helpful to the pace of foreign direct investment that they need and want to grow that economy. But I still think it'll get through that. It'll just continue to have growing pains. And, you know, in the solar area, we've seen a little bit of that. I think the main feature in solar, honestly, in renewable energy has been massive amount of interest in it, which continues. and so in some respects it's a buyer's market but we still see real value in the assets that are being built.

25:30 And you touched on it a little bit in your comments about Geoverse but we get the question a lot about why do you need private LTE? Why would people maybe want enterprise 5G solutions inside of a factory or a different business as opposed to using Wi-Fi. So could you elaborate a little bit on kind of why building owners or enterprise people would want a private LTE or a private 5G network but built by some neutral host? Sure. And I think I'd add to that it's also, which I know I didn't really mention in my remarks, it's also, you know, I also think we're moving to a much less cumbersome much more cost-effective solution than the DAS solution, too.

26:16 So it also affects, so there's kind of two aspects, which is a better solution than Wi-Fi presents today, and then the second aspect is so-called five-bar coverage indoors, bringing macro network coverage indoors. So on the first aspect, Wi-Fi is inherently not as safe a protocol as the cellular protocols, if you will. It doesn't allow nearly as many connected devices as the emerging 5G technologies will allow. And it's not nearly as robust in terms of what you can put in it.

27:07 I don't know that there are network slicing technologies involved with Wi-Fi. Wi-Fi has its purpose and will continue to have its purpose, but I think it's just if you're really going to go to the next level and put mission-critical systems on your wireless connectivity, I think Wi-Fi is not a great answer. If you look at other places in the world, like Europe has been actually well ahead on this in terms of industrial IoT, and you can see that. You need to know you've got a very reliable, very secure solution. You want to be able to connect multiple devices and sensors, and you want to be able to do it at low latency.

27:59 So I just think there's a tremendous amount to offer. And what didn't exist before, I mean, I think part of what's enabling this is also regulatory innovation, right? So the whole CBRS development that the FCC led and other jurisdictions are now looking at or copying or doing similar things really enables you to have that licensed spectrum indoors that The enterprise can drive as opposed to waiting for a macro carrier to get around to it. And the other advantage you have on that respect is without setting up and having to do RF coordination with multiple carriers, you can set up a multiple carrier-capable solution. So as occupants change and their preferred carrier changes, you don't have to to make any changes.

29:04 So I think there's a reason there's a lot of excitement around this, but it's still early, right? The devices are just starting to roll out, sort of the mainstream devices like the iPhone 11 are starting to roll out with CBRS embedded. There are other areas. We produce SIMs that we can put in customer devices today, but that the ecosystem is still developing. And the last one for me is then obviously the minority interests have continued to grow, 25 million in 2019, 32 million over three years. You laid out a couple of them, but how should we think about how much of your checkbook, because you still have a pretty plush checkbook, how much more of your checkbook are you looking to put into minority interests and then when would we get a sense of How best from us on the outside valuing what you've already invested?

30:05 We do evaluate things as they come, as you know well, Rick, right? So everything has that caveat. But sitting here today, I wouldn't expect the minority investments to be that large in the next three years as they were in the last three years, just because there's some unusual items in that and because we think we have and many, many, many more. and both are not sort of normal. You know, the Australian neutral host business is, you know, one where in a lot of other areas we would have done it as a controlled investment if we did it.

31:11 And the XCOM investment was just kind of what we thought was a special opportunity. All right. And the new satellite technology, was that the OneWeb one that you did? No, this is an antenna technology. OneWeb was quite a bit longer ago. This is a new antenna technology, and it's a relatively small amount of money. Is it a steerable antenna, a flat antenna? What kind of satellite antenna technology is it thinking about? Flat, passive, multi-band. It's pretty interesting, but it's a small investment for us, and I don't really want to be their disclosure vehicle. All right, thanks for the information. Your next question is from the line of Greg Burns from Sedodian Call.

32:04 Your line is now open. Morning. I just wanted to touch on the International Telecom. You had mentioned the growth in the wireless. Part of that business has been lagging your expectations. So what are your plans or, you know... How do you intend to maybe turn that part of the business around and get some growth out of that side of the business? I think the first one is do a better job on sales and marketing. In a couple markets, we know and the leadership teams know that they can and should be doing a better job on the customer acquisition and the marketing side.

32:52 And then there's an element of recovery. I mean, some of that was the Virgin Islands where, you know, just was not our focus. We didn't want to focus on growing a new mobile product while we were building the recovery of the core fixed line data business. And, you know, with that done, you know, we're now in a position to, you know, put more attention on that growth side. It's a combination of things, but frankly, it's not rocket science. We just simply haven't executed it. Okay, and then when we look at the operating margin on the international segment, obviously you get more scale there.

33:37 You've seen some nice margin expansion this quarter. How should we think about – now, do you have a long or medium to long-term target of where you think the operating margin on that business – Is there further room for operating leverage on the international side of the business? Greg, it's Justin. I think we definitely have room to keep moving that up. If you go back when we first bought those properties in 2016, we said it's just going to take us some time. If you go back and look at the quarter before the hurricane, we've moved those margins up on international terms. Pretty significant amount, and I think we still have room to go. It's just going to be slow. It's just a slow kind of process to kind of work your way through it in these small markets.

34:30 Okay. And then in the U.S. telecom, you mentioned $20 million for backhaul and site builds. Is that part of the AT&T FirstNet, or is that actual like CapEx? It's our CapEx in relation to that contract, but it's our CapEx, our assets. Okay. And lastly, just on some of the investments like Geoverse and others, Rick had asked about making some further equity investments, but in terms of putting... Operating capital or increasing the spend to grow some of these businesses. What's your view on that this year?

35:20 Where are we at? Should we expect increased investments that might show up in the P&L this year to get those businesses to accelerate the growth of those businesses? Yeah, I think it is case by case. In some cases, I don't expect it because there's other funding sources, particularly in some of the minority areas. Investment in other cases, I think the answer is yes, but largely success-based. I don't see a big increase in the pace on the control of things outside of success-based deployment, if you will.

36:08 Okay, thank you. Yeah. Again, ladies and gentlemen, if you have a question at this time, please press the star and then 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. Your next question is from the line of Hamid Khorsand from BWS Financial. Your line is now open. First off, on the first net related question is because of the push-out, does that mean anything from a Do you think any of that gets recognized in Q1? No, we would need to do the construction before we flip over to the maintenance, but in the meantime, we pick up the roaming revenue.

37:00 Okay, and because of that roaming revenue, is that what drove the Q4 U.S. revenue higher this past Q4? Yeah, the wholesale and the cap too, yeah. Okay, now what I'm trying to understand is that is it, you know, recurring in any aspect? Are you able to maintain pricing or see any kind of volume increase beyond just what you have with AT&T on the first net deal? I think there are things we're pursuing, but there are puts and takes in that area. So, you know, I think I'd refer to the answer before that. On that, I think on the first net side, it's outside of construction revenue, which is really not meaningful economically.

37:54 We're not expecting any big movements. It should be a fairly steady state. Okay. All right. That was it. Thank you. Sure. We have our follow-up question from Mr. Alan Clee from National Securities Corporation. Your line is now open. Yes, hi. So earlier you said that in the quarter that the adjusted EBITDA loss for emerging investments was around $1.5 million. Is it you're thinking that it kind of stays at that rate on a quarterly run rate in 2020 or it moves higher or lower? Thank you. I would say it'll hover around that rate, but I think as we gain success, it could grow as we continue to invest in it. But I don't think it'd be materially in the short term.

38:54 So when you say grow, you mean it could become a little bit of a larger loss on a quarterly basis in 2020? Yeah. It could, but it's blending, you know, the way we're operating, we're really blending those operations now, you know, with our other operations in U.S. Telecom, so it's a little hard to do a perfect allocation, but I think what Justin is trying to say is there's, you know, as you're ramping up a new product and as you have success, the expense can can expand faster than the revenue in the early days, right? So there could be some of that, but we're not necessarily expecting that to be material in the 2020 numbers.

39:46 Okay, thank you. Sure. At this time, I would like to turn it back to the speakers for any further comments. We have no further comments, everybody. Thank you, everyone, and we'll see you in a couple of months for Q1. Thank you, presenters. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.