ATN International (NASDAQ:ATNI) Q1 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by, and welcome to the ATN International First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to Justin Benicasa, Chief Financial Officer. Thank you, and please go ahead, sir.

0:31 Thank you, operator. Good morning, everyone, and thank you for joining us on our call to review our first quarter 2020 results. With me here, sitting a socially safe distance from me, is Michael Prior, ATN's chief executive officer. 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... 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 the 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.

1:23 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, we refer you to our earnings release on our website at atni.com or to the 8K filing provided to the FCC. And I'll turn the call back to Michael.

1:43 Thank you, Justin. I kind of like having you a distance away. Let me keep that. All right, joking aside, obviously major, major changes going on, the understatement over the past couple months. And because of that, I'm going to limit the amount of time I spend in my prepared remarks covering the historical results in order to make sure investors get a sense of our outlook and potential impacts from the coronavirus pandemic. Sammy said that I want to note that this is the third quarter in a row of significantly more positive results from our telecom operations. There are still some areas that need improvement, but the overall trajectory has been strong and shows real progress.

2:31 International telecom experienced moderate revenue growth and another quarter of strong broadband subscriber gains. And U.S. Telecom delivered results that reflected recovery in that business. Similar to the fourth quarter and far ahead of one year ago. Consolidated operating income and net income also would have shown greater improvement, but some negative items that Justin will touch on held us back from a strong profit performance. Since the coronavirus outbreak turned into a global pandemic in the last part of the quarter, we have taken a number of actions to adapt and to keep our employees and customers safe. So far, we have been fortunate in not having any related health impacts to our roughly 1,600 employees, and we have been able to keep substantially all of our services running.

3:27 We have not taken any major hits to date, and we are moving rapidly to adapt our operations to the current uncertain environment. As to outlook, we feel pretty good about the underlying strength of our business and demand for our services. But we do expect there will be an impact from the economic pain facing our customers and the communities in which we operate. That said, our ability to weather any adverse impacts and to take affirmative actions to add value to our businesses is strengthened by our positive net cash position and substantial liquidity. So with that, I'll turn to the individual operating segments, starting with international telecoms. So this segment turned in another solid quarter.

4:14 Revenue and EBITDA both showed modest growth, mainly due to increased broadband and other fixed data revenue. Mobile revenue was flat, and mobile subscribers were down year over year. Data subscribers, however, increased 8% year over year, roughly consistent with recent quarters. And voice subscribers actually increased during the quarter, as more customers took up our bundled broadband and voice offerings in several markets. And just so we'll walk you through the cash flows, but this quarter continued the strong performance of 2019 in that regard. So looking at the likely coronavirus impact on this operating segment, keep in mind that more than half of our international telecom revenue comes from markets that rely on tourism as a major economic contributor.

5:06 Right now, there is very little travel into or out of any of these markets, and hotels, restaurants, taxis, and many other small businesses are hurting. That impacts our revenues and margins directly today, but the indirect impact could be greater if there was a prolonged downturn. Against that, I'll note that more of our revenue comes from residential customers, and it will take severe impacts indeed for them to stop buying high-speed internet or mobile phone service altogether. As a smaller matter, we are actively working not only to adapt our operations to the changed circumstances but to take the opportunity to achieve additional operating efficiencies such as increased digital engagement with our customers which lowers care and billing costs and improves their experience.

6:03 Both customers and employees are having to adapt to new interfaces and technologies and we believe that progress will remain post-crisis. Each of our international telecom businesses are looking closely at their operating and capital costs to see where they can reduce or defer cash outflows as we build up additional resiliency in the face of the uncertain short-term future. Some of these changes may have long-lasting benefits. In addition to these more defensive or protective moods, in light of our relative financial strength, we are also looking at investments and moves we can make today that could have a multiplier effect in the recovery. Among other things, this includes helping our customer base and building loyalty through discounted services, waiver of late fees, free Wi-Fi spots for those without connections and other measures. Looking to take market share through selectively investing in capacity and capabilities in the heart of the crisis.

7:08 Looking for smaller, so-called bolt-on deals that can expand our territory, scale, or service breadth. And working with government to deploy solutions that help with its pandemic response and in economic recovery. Our goal is not just to weather this storm, but to position our businesses to thrive. Moving to U.S. Telecom, this was the third consecutive quarter in the segment's recovery. The change is apparent in the year-on-year comparisons. Revenue and EBITDA are up, with the main drivers being the FirstNet deal and CAF2 revenue, as much discussed. But there are some other smaller items going in the right direction as well, including enterprise and fixed wireless broadband sales and some promising smaller wholesale fiber network investments.

8:00 From what we can see today, we think this segment is less sensitive to coronavirus-related impacts than our international telecom segment. A substantial majority of our revenues and cash flows comes from multi-year fixed-price contracts or government subsidy programs. Nothing is risk-free, but we are not expecting changes to any of those contracts. The pandemic-related effects on this segment are mainly tied to a slowdown in the timing of expected growth. At the moment, the government restrictions and measures we have taken for the safety of our employees have put initiatives on hold, from WISP sales activities to larger strategic customer discussions in private LTE.

8:47 However, for the time being, we are still making some progress in advancing customer discussions and winning some in-progress or inbound commercial and consumer business. Lastly, with renewable energy segment, this segment showed no year-on-year revenue growth despite progress in 2019 bringing additional facilities forward, building the customer pipelines. Pre-coronavirus, we were expecting to see solid revenue expansion in the first few quarters of this year as a result of those activities. Now, we expect revenues to decline further in the second quarter due to factory shutdowns at the direction of the Indian government.

9:33 We are undertaking cash conservation measures during this time to try to prevent negative operating cash flows while our customers' electricity needs are at historically low levels. So in summary, as I said at the outset, we feel good about the underlying strength of our business and the demand for our telecom services. While our operations have been relatively recession-resistant in the past, we are in unchartered territory at the moment. The impact of the measures governments, companies, and individuals have taken to reduce very serious health risks is, of course, a big unknown. It's hard for us to predict the negative impacts on our various operations when we don't know how long government measures will last and how individuals and businesses will react as these measures ease.

10:27 But we will try to give you a sense of it as we go along in incoming quarters. And really, the fundamental message is you control what you can control. At the moment, we're focusing on three major areas. In order of priority, they are adapting our operations to the pandemic to enhance employee and customer safety and comply with changing government requirements, deal with new operational limits and customer interactions, examining all cash flows carefully to see where we can further enhance our financial condition in the face of market uncertainties, and looking at smaller and larger strategic moves we can undertake to create You may begin.

11:20 Okay. All right. Are we back, operator? I think we're on. All right. I think we dropped off right after Michael handed off. So I'm just going to go back into what I started on the numbers for the quarter. So for the first quarter, total consolidated revenues were $110.9 million, up 7% from last year's reported total of $103.3 million. This year and year growth was led by the recovery of our U.S. telecom segment, where revenues increased 27% over last year, and we continued to experience steady growth in our international telecom segment. Consolidated even for the quarter was $29.8 million, up 31% over the first quarter of 2019. I should also note that we restructured the presentation of revenues on the consolidated P&L into two revenue lines, communication services and other revenues to better align with industry standards and how management looks at the business.

12:19 In addition, we provide a further breakout of each of these revenue categories in the segment financial tables. Looking at each of the segments and starting with international telecoms, Revenues were $82.3 million, up from $80.3 million last year, and EBITDA was up 3% to $27.8 million. Similar to the last several quarters, much of the year-over-year increases comes from our broadband subscriber and revenue growth in the international markets where we have invested in expanding and upgrading our fiber networks. Capital expenditures in the quarter totaled $10.5 million. Early in the year, we expected 2020 capital expenditures in the segment to be between $45 and $50 million for both maintenance and additional growth projects in multiple markets. As we continue to assess the impact of the pandemic, we currently expect CapEx to be below this forecast as we anticipate delays in completing certain projects and choose to defer or reduce some of the discretionary spending. We hope to have more clarity on the 2020 CapEx forecast by the time of our second quarter earnings release.

13:31 In the U.S. telecom segment, revenues were $27.3 million for the quarter, up from $21.5 million a year ago, and adjusted EBITDA was $8.1 million, up significantly from the $2.1 million in the first quarter of 2019. This increase was primarily from the CAF II federal support revenue that began in the second quarter of 2019 and increases in carrier service revenue as part of the FirstNet transaction. I should note that given the terms of the recent carrier service contracts we've entered into, we expect very little seasonality in revenue in EBITDA this year compared to past years. With respect to site construction and related revenue under the FirstNet agreement, the overall timing has been delayed 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 any of the pandemic impacts.

14:31 As we noted in the release, though, the delay in construction revenue should have little impact on operating income as revenues will largely be offset by construction expenses. Similar to the international telecom segment, we also expect capital expenditures to be lower in the U.S. segment, as about half of the original forecast at $35 to $40 million is for tower construction and building backhaul as part of the first net agreement. Some portion of that will likely be pushed into 2021. In the renewable energy segment, revenues were $1.3 million in the first quarter compared to $1.5 million last year, and EBITDA was $158,000 compared to $413,000.

15:19 As we noted in the release and Michael mentioned, we do expect revenues in EBITDA and their segments to be negatively impacted in the short term as many of our customers in India were forced to close their operations during the pandemic and power usage declined. We incurred a consolidated net loss for the quarter of $1 million or $0.06 per share. This includes a $2 million write-down of our one web minority investment and $900,000 of FX losses. Also included in operating expense for the quarter was $1.2 million of non-cash stock-based compensation expense and $1.6 million of costs related to the early stage investments in the U.S. telecom segment. The effective tax rate for the quarter was approximately 32%. However, we anticipate a full year rate in the mid-teens as we expect a benefit from NOL carrybacks as part of the CARES Act.

16:17 Moving to the balance sheet, in March 31, we ended the year with total cash and short-term investments of $147 million and total debt outstanding of $85.5 million. In addition to our cash position, we've committed credit lines of $200 million which leaves us pretty well positioned to manage through uncertain economic times and provides us with significant financial flexibility.

16:40 And with that, operator, I'd like to okay, before you go, yeah, before you go back to the operator, I think I got a note that we cut off before the end of my speak part, so I think one, I just finished at the very end It might be some overlap, but just if you can bear with us, operators. So the last two points I made were first that, you know, since we don't you know, since it's really hard to predict what the situation is going to be going forward, we have you know, we're focused on the things we can control, and I talked about three major areas in order of priority. The first is adapting to the pandemic and the government measures related to the pandemic and making sure our employees and customers are safe.

17:37 The second point is we've been examining all cash outflows carefully to see where we can further enhance our financial condition in the face of the uncertainties. And the last one is looking at smaller and larger strategic moves Thank you very much. Thank you. So I think we've now covered the glitch. Hopefully we have.

18:29 And operator, why don't we now field questions, please. As a reminder, if you have a question at this time, please press star and the number one 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 moment of Greg Burns with the Doty Company through Linus Officer.

18:53 Good morning. Good morning. I just wanted to follow up a little bit on the expected impacts from the coronavirus you're looking at in the international telecom segment. What percent of, I guess, the markets that you think will be affected because of tourism, what percent of those markets are business versus consumer, and is it the dynamic that you expect the businesses to temporarily turn off the services while they wait for the economy to rebound? Or are they on usage-based models? Why do you expect that impact?

19:31 Yeah. Greg, I don't have a percentage for you except to say, repeat what I said, which is, you know, the bigger portion of our revenue comes from the consumer or residential side. So there's a couple different things that can happen. So, you know, an extreme version would be a hotel or a restaurant that has no occupancy, right? In some cases, there's some services they're keeping going, but in others, particularly if they're shut down for prolonged periods, Thank you very much. haven't seen it significant, and people are very, even more reliant on their telecom services in this event. And to counter some of the commercial business that's gone down, and some has already gone down, there have been some increases in other areas like the governments in several

21:04 markets We are working with the government to help them put out measures to set up programs and so on, both in our managed service side and on the connectivity side. So there may be some offset, but I think the key takeaway should be that if there is a prolonged downturn, these markets, multiple markets, so Caymans, U.S. Virgin Islands, Bermuda, a little bit less but still very important. They really rely on tourism as a major economic driver. So that's the risk we see.

21:45 Okay, great. And then turning to the U.S. telecom, the fixed revenue is really strong this quarter. I mean, I think it was like been averaging like sub-1 million, but it was a little over 3 million this quarter. Can you just Talk about what's driving that, and is this like a good run rate to build off of here for the first quarter? Thanks.

22:10 Say that again, Greg. It was faint. I don't know what's wrong with our connection. Can you repeat from the beginning, please?

22:16 Yeah, it was just around the strength and the fixed component of the U.S. wireless. You know, over $3 million this quarter. You know, it's been, I think, sub $1 million for like the last year or so, so I just want to better understand the strength you're seeing in that line item and is this a good level to build off of or a good run rate for that business?

22:41 Yeah, that level, Gregor, Justin, that level is good. That is the cap. The majority of that is the Connect America fund revenue in there. Oh, okay. And again, that started, that was not there a year ago. So that started in the second quarter of last year.

23:05 Okay, great. Thanks. In terms of the carrier services part of the U.S. Telecom, what percent of that business is fixed now versus variable?

23:18 We don't have a percentage, but the vast substantial majority. So just how about that? It's The part that is variable is relatively small. Okay.

23:32 All right, great. Thank you.

23:34 Yeah. And our next question comes from the line of Rick Prentice with Raymond James. Your line is open.

23:45 Yeah, sorry. I missed some of the stuff in between yours dropping and then mine dropping. First question I've got, and first, actually, I hope you, your family, employees are all safe and well. Obviously, it's a difficult time for us all, and it sounds like you guys are prioritizing things correctly.

24:01 Thank you, and likewise.

24:04 Thanks. From a business perspective, maybe first, what happened in April different than March? Can you give us any kind of color about what kind of magnitude – of impacts you've seen, knowing that I think a lot of your business actually is seasonal, maybe more skewed towards the winter months than the spring months, but just anything anecdotal as far as impact April versus what you were seeing through the first quarter?

24:34 Yeah, I think not major, I would say, first of all, but definitely some. So the types of impacts we saw range from the fact that gross ads have gone down in multiple businesses because the selling activity is way down. You don't have customers coming into your stores in most markets for that period, and there were some outbound sales efforts that we had to completely curtail in things like fixed wireless in the U.S. The second thing that happens, though, that's the flip side of that is churn goes down, right, because the same thing's happening the other way.

25:24 And, you know, and I would say net, net, net, there's probably more costs that go down than go up because of it on the cost side. Other revenues that are impacted are... The roaming revenues, for example, in our international telecom segment, those aren't huge, and they wouldn't typically be huge in the first quarter in particular, but they're not nothing. And right now, our customers are not traveling and roaming, and nobody's traveling to the places where our networks are in these international markets.

26:06 And then

26:08 So that's a negative impact as well. And I think the other thing is there's normally some revenue generated from overage charges and things like that. Late fees. Late fees and so on. And those are not there. I mean, we've been... First of all, usage on some things, certainly mobile is down, so you don't have the overage charges. And then in other areas, we've waived late fees for those who are affected by the pandemic. And I just think the behaviors have changed a little there. And then lastly, as I said in answer to the before, certain activities, customers who are hotels or condos or restaurants, you know, you can see no activity that didn't necessarily have a material impact, you know, in the first few weeks of this, but as it grows, you know, that could have more of an impact over time if these markets don't start to open up.

27:25 Makes sense. How about from a bad debt or accounts receivable standpoint? Anything I know you're going to waive late fees on some of the items, but any larger issue on bad debt or accounts receivables?

27:40 We have heavy cash collections, so it's a little tough for us to tell right now because a lot of the places they typically pay in cash, they have to find other avenues. I think we'll see more. It's likely we'll see some more bad debt in the second quarter, but it's hard to put a size on that right now. Just because a lot of people aren't able to actually get to places to pay.

28:09 Right. Right. Okay. And then you mentioned the new reporting details. Is it possible, or have you maybe posted it's been a busy earnings week, to get like the recast second quarter, third quarter, fourth quarter, 19 numbers so we can look at mobility versus fixed versus carrier versus other for the different silos?

28:35 Yeah, we probably could do that. Let me talk with the guys offline on that. We'll have to put it out there somehow, maybe up on the website or something.

28:43 Right. And as we think about not just the history but the drivers and the metrics, you've done a good job giving us some of the – International customers and broadband versus data. What kind of metrics should we be looking at as drivers on the domestic side for mobile versus fixed versus carrier?

29:06 Yeah, I think, you know, as we talked about, a lot of that is fairly fixed, certainly the carrier services side. And, you know, that's something... We need to look at to the point where it becomes material to put additional information out there. I think some of the more important stuff from an economic standpoint are not your classic metrics. So it's new enterprise contracts, wholesale contracts, but there are some other areas. Certainly, as private LTE grows, there may be I expect that industry will start to do something like square footage under operation or something like that or buildings under operation that some of the DAS providers, for example, do.

30:03 So we'll look at that. Those things aren't material yet, so we're kind of waiting to see where that goes.

30:13 Also notice that you guys have now differentiated between an EBITDA and adjusted EBITDA for some of the miscellaneous items. What triggered that addition of an adjusted EBITDA versus EBITDA?

30:27 I'm one of these people, I can't stand the phrase adjusted EBITDA. I feel like it's just, so I just feel like we've had it for too long. And we're going to try to get to something that is like everybody knows what it means and everybody calculates it the same way, which is EBITDA. and then do the math for them, give everybody the other piece part so they can make the adjustments they like. But my problem with adjusted EBITDA is you can't compare adjusted EBITDA from one company to another with confidence.

31:02 Right. That actually was my last question. You mentioned that one of the reasons for breaking out the new reporting was industry comps. Who do you consider your industry comps as you look at EBITDA, adjusted EBITDA and other things?

31:15 Yeah, it depends obviously on the segment, you know, and none of them are perfect. So in our U.S. telecom segment, it's really hard to find a comp, right, because of the nature of our business and the blend of our business. You know, there's public regional players like Shentel that some of you cover, you cover, Rick, but their operation is, you know, much more likely A lot of our international telecoms operations than our U.S. telecoms. And in international, there's, you know, Lilac is an example. Millicom is an example. But they're also very different because they're much larger and operate in both of them largely have their, you know, their biggest bulk of revenue and cash flows comes from Latin America as opposed to the Caribbean.

32:14 So, but they, you know, they're at least somewhat instructive.

32:21 Okay, very good. Thanks, and again, best wishes for you, your family, and employees as we make it through this difficult time.

32:28 Yeah, same to you. Thanks. Our next question comes from the line of Alan Cleave with National Security. Your line is open. Thank you.

32:39 Hello, can you give us an update on your emerging investments? And also on the cash flow statement, you showed a $2.8 million purchase of a strategic investment, so maybe also kind of touch on that. Thank you.

32:56 Yes, I don't really have, okay, so I don't have anything substantial to say on the emerging investments. There's, you know, I refer back to my comments that Some of what's going on feels like it could slow down a little in terms of momentum just because it's harder when you're in that stage to get deals done. Having said that, for example, in private LTE, we continue to make progress with some customer discussions and items there. Right now, we think it's maybe slowed down What we'd hoped to see happen in this year, but not derailed it, I would say. And, you know, in other areas, we've got, you know, we have, you know, we've made some good progress, put some additional, provided some additional funding in Australia to the power business there, and we've seen some tangible progress there, but it's still early stage, you know, in terms of scale and And the number you're referencing was an additional investment in the Australia operations.

34:21 Okay, great. In international telecom, is there a way to think about how much of your revenue typically comes from tourists that are visiting?

34:36 Not a lot of our revenue comes from tourists, Alan. It's more indirect. Wireless roaming revenue does come basically from those tourists, although we get paid far less than I suspect they pay their carrier. It's really the indirect impact that I talked about. It's our customers who serve the tourists or work for businesses that serve the tourists. We saw back in the financial recession, which was nothing like this in terms of uncertainty and shutdown of activity, but there was a marketed downturn in tourism for those areas during that period.

35:31 And, you know, we could see that. It didn't have a major impact on us because things basically stayed open. And so that's the uncertainty is if businesses don't last or can't stay open, then there'll be more impact on us.

35:54 Thank you. My last question is on tourism. Domestic Telecom. Besides CAF2 and FirstNet, is there anything else that's impacting the business or you expect to impact the business that's supporting better results than what you've had before or the other side of it?

36:19 Well, you know, I think we've solidified more than just FirstNet on the wholesale side, on the carrier service side, because that, you know, as we've said, we feel fairly good about those numbers. There are some pieces of that that are still variable, but we don't really see – we probably think there's a little more upside potential there than downside. And then on the – Other side of the business is some of the things I referred to before. It's some enterprise sales and things like that that we think could, again, probably have more upside potential than downside because it's a small but growing piece of that business.

37:04 And I would say the same is true of the fixed broadband service, which we do with a fixed wireless solution.

37:15 Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star and the number one on your touchtone telephone. Our next question is from the line of Hamid Khorzan with BWS Financial. Your line is open.

37:34 Hi. The first question I had was, what kind of growth are you expecting this year that your termination expense is higher in Q1? Say that again, Ahmed? Your termination access expenses were higher in Q1 of this year. And the trend is changing up in the trend here. So I'm just trying to get an understanding. What kind of data or voice kind of growth are you expecting that you're spending more?

38:09 It's just, it's really increased data use, right? So as we, you know, in multiple markets, you know, you've seen the broadband subscriber growth, there's been other data service growth, and that's, so that increases our backhaul requirements. And I think that's, so I think that's the major piece of it.

38:34 And then the other question I have was in the Diana, just given the elections are over there, are you comfortable with the current climate?

38:47 Comfortable with the current climate?

38:49 The political climate, yeah.

38:53 In Diana? No. No, don't think it's great for the country right now, the delay, you know, in a, you know, Final and accepted election results. Don't think that's a great outcome. You know, I think IMF and others are still predicting fairly strong growth even in the face of the coronavirus this year in Guyana, but less so than they thought. I definitely think this political uncertainty slows foreign direct investment. It hasn't slowed Exxon, by all reports, and they've said that in their recent earnings call, but a lot of the other related sort of triggered benefits, I guess, of the oil development, I think you've, you know, inhibited a little bit by that. Okay.

39:56 And Hamid, just, you know, just to expand on your question, The first part of the question, probably if you're looking at the comparison of year-over-year quarters and the termination and access, in 19 we had some one-time kind of credits that were going through there that artificially made it lower. So it's not necessarily up off of that year, it's just 19 was lower. Okay, thank you.

40:24 And then the last question I had was regarding the U.S. business industry. Is that all really FirstNet just using the current network structure, or are you adding some towers to help grow that business right now with FirstNet contract?

40:42 No, it's just using the current network. We're not expanding the network. We will spend some money on infrastructure in terms of backhaul and towers as part of that deal, but the traffic right now is on the existing network.

41:02 Thank you. Thank you, and I'm not showing any further questions, so I'm now going to call back over to management for closing remarks.

41:12 Okay, thank you, everybody. Thanks for joining us. Be well, and we will see you in another quarter. Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.