UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 8-K
_____________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event Reported): August 7, 2018
Shenandoah Telecommunications Company
(Exact Name of Registrant as Specified in Charter)
| Virginia | 0-9881 | 54-1162807 |
| (State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) |
| 500 Shentel Way P.O. Box 459, Edinburg, Virginia 22824 |
| (Address of Principal Executive Offices) (Zip Code) |
(540) 984-4141
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
| Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | ||
| [ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
| [ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
| [ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| [ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Item 2.02. Results of Operations and Financial Condition.
On August 7, 2018, Shenandoah Telecommunications Company (the “Company”) issued a press release announcing its financial position as of June 30, 2018, results of operations for the three and six months ended June 30, 2018, and other related information. The Company also posted supplemental earnings presentation materials on the investor section of the Company’s website at www.Shentel.com. A copy of the press release is furnished as Exhibit 99.1 and is incorporated herein by reference. These materials may contain forward-looking statements about Shenandoah Telecommunications Company regarding, among other things, our business strategy, our prospects and our financial position. These statements can be identified by the use of forwardlooking terminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should,” “could,” or “anticipates” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties. Shenandoah Telecommunications Company undertakes no obligation to revise or update such statements to reflect current events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
The following exhibit is furnished with this Current Report on Form 8-K.
99.1* Second Quarter 2018 Earnings Press Release
* Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Shenandoah Telecommunications Company | ||
| Date: August 7, 2018 | By: | /s/ James F. Woodward |
| James F. Woodward | ||
| Senior Vice President - Finance and Chief Financial Officer | ||
EXHIBIT 99.1
Shenandoah Telecommunications Company Reports Second Quarter 2018 Results
Company Achieves Triple Digit Operating Income Growth
Second Quarter 2018 Highlights
- Second quarter operating revenue of $154.0 million
- Second quarter operating income increased 126.6%
- Second quarter net income of $7.8 million, resulting in net income of $0.16 per share
- Second quarter Adjusted OIBDA of $69.8 million
Please refer to our Second Quarter 2018 Earnings Presentation Supplement available at https://investor.shentel.com/ for additional information, including matters that will be referenced during the Company’s conference call. Included in this release are certain non-GAAP financial measures that are not determined in accordance with US generally accepted accounting principles. Please refer to page 10 for additional information for non-GAAP measures.
EDINBURG, Va., Aug. 07, 2018 (GLOBE NEWSWIRE) -- Shenandoah Telecommunications Company (“Shentel”) (NASDAQ: SHEN) announces financial and operating results for the three months ended June 30, 2018.
Second Quarter Results
Consolidated
- Net income for the three months ended June 30, 2018 was $7.8 million, or $0.16 per share, compared with a net loss of $80 thousand, or less than $0.01 per share, in the second quarter of 2017. Effective January 1, 2018, the Company adopted the new revenue recognition standard, which requires the Company to record costs such as commissions for the national sales channel that are settled separately with Sprint as reductions of revenue. Previously these costs were recorded in costs of goods and services and in selling, general and administrative expense. Excluding the impact of this standard, second quarter net income was $5.9 million, or $0.12 per share, due to the deferral of certain commissions and device costs as required by the new revenue recognition standard.
- Operating revenues for the three months ended June 30, 2018 were $154.0 million, a year over year increase of 0.5%, compared with $153.3 million for the three months ended June 30, 2017. Excluding the impact of the new revenue recognition standard, total operating revenues improved approximately $4.8 million, or 3.1%, driven by Wireless and Cable operations, partially offset by Wireline.
- Operating expenses for the second quarter of 2018 were $135.3 million, compared with $145.0 million for the equivalent quarter in the prior year. Excluding the impacts of the new revenue recognition standard, operating expenses decreased $3.0 million, or 2.1% due to the absence of acquisition and integration costs related to the prior year nTelos integration, and a decrease in depreciation and amortization as assets acquired in the nTelos acquisition were retired. These declines were partially offset by increases in network and selling costs associated with the continued expansion of our networks to support the increase and demand for the subscriber base.
- Operating income increased 126.6% in the second quarter of 2018 to $18.7 million from $8.3 million in the equivalent quarter of the prior year.
- Adjusted OIBDA for the three months ended June 30, 2018 was $69.8 million, compared with $69.4 million for the three months ended June 30, 2017. Continuing OIBDA for the three months ended June 30, 2018 was $60.3 million, compared with $60.3 million for the three months ended June 30, 2017. The adoption of the new revenue recognition standard did not have an impact on adjusted OIBDA.
Wireless
- Wireless operating revenues increased $2.2 million, excluding the impacts of adopting the new revenue recognition standard, compared with the three months ended June 30, 2017. The increase was driven by growth in postpaid and prepaid PCS subscribers, improvements in PCS average monthly churn for postpaid and prepaid, and was partially offset by a decline in average revenue per subscriber primarily related to promotions and discounts.
- Wireless operating expenses for the three months ended June 30, 2018 were $92.5 million, compared with $107.8 million for the three months ended June 30, 2017, a year over year decrease of 14.2%. Excluding the impacts of the new revenue recognition standard, operating expenses decreased $8.6 million due to the absence of acquisition and integration costs related to the prior year nTelos integration and a reduction in depreciation and amortization. These decreases were partially offset by increases in network costs resulting from the completion of our 4G roll-out and expanded coverage area, as well as additional selling costs.
- Wireless adjusted OIBDA for the three months ended June 30, 2018 was $60.1 million, compared with $58.2 million for the three months ended June 30, 2017. Wireless continuing OIBDA for the three months ended June 30, 2018 was $50.5 million, compared with $49.0 million from the three months ended June 30, 2017.
- Shentel served 780,658 wireless postpaid retail PCS subscribers as of June 30, 2018, up 6.6% over the second quarter of 2017. Postpaid churn for the three months ended June 30, 2018, was 1.67%, compared with 2.00% for the three months ended June 30, 2017. The Company had net additions of 5,797 postpaid customers in the three months ended June 30, 2018, compared with net additions of 15,514 for the three months ended June 30, 2017. As of the three months ended June 30, 2018, tablets and data devices were 14% of the postpaid base reflecting a net gain of 821 for these devices over the prior year.
Cable
- Cable operating revenues for the second quarter of 2018 were $32.1 million, a year over year increase of 8.6% compared with $29.6 million for the three months ended June 30, 2017. The increase was primarily due to growth in broadband ARPU and rate increases for video services.
- Cable operating expenses were flat at $26.0 million in the second quarter of both 2018 and 2017. The Company added 3,519 High Speed Data users and 790 voice users, and lost 3,448 video users.
- Cable adjusted OIBDA for the three months ended June 30, 2018 was $12.3 million, an increase of 23.7%.
Wireline
- Wireline operating revenues for the three months ended June 30, 2018 were $19.1 million, compared with $19.6 million for the prior year second quarter. The decrease in operating revenues was primarily attributable to migrating Wireless backhaul circuits from traditional circuit-switched facilities to more cost effective Voice Over IP ("VoIP") facilities.
- Wireline operating expenses for the three months ended June 30, 2018 were $14.3 million, compared with $14.2 million for the quarter ended June 30, 2017, due primarily to costs to support new fiber contracts.
- Wireline adjusted OIBDA for the three months ended June 30, 2018 was $8.0 million, compared with $8.6 million for the prior year equivalent quarter, primarily driven by the decline in revenue.
President and CEO Christopher E. French commented, “Shentel delivered solid second quarter results which included consolidated revenue growth, significantly enhanced operating income and improved net profitability. In the past year, our Wireless geographic coverage area has grown significantly with the expansion of our affiliate agreement with Sprint, and we are focused on driving distribution and activation levels in our expanded footprint. During the second quarter, our wireless segment achieved growth in both postpaid and prepaid customers, reflective of Shentel’s reputation as a provider of reliable coverage, excellent service and robust capacity which has positioned us as the ‘carrier of choice’ in the markets in which we operate."
“Revenues in our cable segment grew 9% in the second quarter, with increased RGUs, and we are encouraged by the opportunity to capture additional market share as consumers seek the high speed bandwidth and dependable service that our network provides. In the Wireline segment we continued our focus on growth in our regional fiber network and transitioning our legacy telephone area from DSL service to cable modem service. Our focus on providing high quality, reliable service across all of our offerings remains the cornerstone of our service commitment to our customers and the foundation for our continued growth."
Network & Technology Highlights
- Beginning in 2018, we began transitioning Wireless backhaul circuits from traditional circuit-switched facilities to VoIP facilities, in our Wireline operations. We expect to complete the transition by year-end 2018 and expect to realize a reduction in overall Wireless network costs beginning in 2019.
Other Information
- Capital expenditures were $62.3 million in the six months ended June 30, 2018 compared with $68.8 million in the comparable 2017 period. The Company's estimated 2018 capital budget remains $163 million.
- Cash and cash equivalents as of June 30, 2018 were $65.6 million, compared with $78.6 million at December 31, 2017.
- Outstanding debt at June 30, 2018 totaled $799.9 million, net of unamortized loan costs, compared to $822.0 million as of December 31, 2017. As of June 30, 2018, no amounts were outstanding under the revolving line of credit. The total leverage ratio as of June 30, 2018 was 2.89.
Conference Call and Webcast
Teleconference Information:
Date: August 7, 2018
Time: 10:00 A.M. (ET)
Dial in number: 1-888-695-7639
Password: 1890438
Audio webcast: http://investor.shentel.com/
An audio replay of the call will be available approximately two hours after the call is complete, through August 16, 2018 by calling (855) 859-2056.
About Shenandoah Telecommunications
Shenandoah Telecommunications Company (Shentel) provides a broad range of diversified communications services through its high speed, state-of-the-art network to customers in the Mid-Atlantic United States. The Company’s services include: wireless voice and data; cable video, internet and digital voice; fiber network and services; and regulated local and long distance telephone. Shentel is the exclusive personal communications service (“PCS”) Affiliate of Sprint in a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. For more information, please visit www.shentel.com.
This release contains forward-looking statements that are subject to various risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of unforeseen factors. A discussion of factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations is available in the Company’s filings with the SEC. Those factors may include changes in general economic conditions, increases in costs, changes in regulation and other competitive factors.
CONTACTS:
Shenandoah Telecommunications, Inc.
James F. Woodward
Senior Vice President, Finance and Chief Financial Officer
540-984-5990
James.Woodward@emp.shentel.com
Or
John Nesbett/Jennifer Belodeau
Institutional Marketing Services (IMS)
203-972-9200
jnesbett@institutionalms.com
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| Operating revenues: | 2018 | 2017 | 2018 | 2017 | |||||||||||
| Service revenues and other | $ | 138,021 | $ | 150,308 | $ | 272,174 | $ | 300,829 | |||||||
| Equipment revenues | 16,009 | 2,950 | 33,588 | 6,309 | |||||||||||
| Total operating revenues | 154,030 | 153,258 | 305,762 | 307,138 | |||||||||||
| Operating expenses: | |||||||||||||||
| Cost of services | 49,134 | 48,416 | 98,476 | 97,193 | |||||||||||
| Cost of goods sold | 15,166 | 4,965 | 30,971 | 9,949 | |||||||||||
| Selling, general and administrative | 29,915 | 43,022 | 58,665 | 83,175 | |||||||||||
| Acquisition, integration and migration expenses | — | 3,678 | — | 8,167 | |||||||||||
| Depreciation and amortization | 41,117 | 44,925 | 84,604 | 89,729 | |||||||||||
| Total operating expenses | 135,332 | 145,006 | 272,716 | 288,213 | |||||||||||
| Operating income (loss) | 18,698 | 8,252 | 33,046 | 18,925 | |||||||||||
| Other income (expense): | |||||||||||||||
| Interest expense | (8,851 | ) | (9,389 | ) | (18,183 | ) | (18,489 | ) | |||||||
| Gain (loss) on investments, net | 56 | 73 | 24 | 193 | |||||||||||
| Non-operating income (loss), net | 783 | 1,224 | 1,804 | 2,479 | |||||||||||
| Income (loss) before income taxes | 10,686 | 160 | 16,691 | 3,108 | |||||||||||
| Income tax expense (benefit) | 2,862 | 240 | 4,038 | 847 | |||||||||||
| Net income (loss) | $ | 7,824 | $ | (80 | ) | $ | 12,653 | $ | 2,261 | ||||||
| Net income (loss) per share: | |||||||||||||||
| Basic | $ | 0.16 | $ | — | $ | 0.26 | $ | 0.05 | |||||||
| Diluted | $ | 0.16 | $ | — | $ | 0.25 | $ | 0.05 | |||||||
| Weighted average shares outstanding, basic | 49,547 | 49,115 | 49,511 | 49,083 | |||||||||||
| Weighted average shares outstanding, diluted | 50,070 | 49,115 | 50,029 | 49,850 | |||||||||||
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| June 30, 2018 | December 31, 2017 | ||||||
| Cash and cash equivalents | $ | 65,569 | $ | 78,585 | |||
| Other current assets | 129,573 | 94,310 | |||||
| Total current assets | 195,142 | 172,895 | |||||
| Investments | 11,949 | 11,472 | |||||
| Property, plant and equipment, net | 668,339 | 686,327 | |||||
| Intangible assets, net | 396,908 | 380,979 | |||||
| Goodwill | 146,497 | 146,497 | |||||
| Deferred charges and other assets, net | 34,021 | 13,690 | |||||
| Total assets | $ | 1,452,856 | $ | 1,411,860 | |||
| Total current liabilities | 138,797 | 137,584 | |||||
| Long-term debt, less current maturities | 715,265 | 757,561 | |||||
| Other liabilities | 180,604 | 166,493 | |||||
| Total shareholders' equity | 418,190 | 350,222 | |||||
| Total liabilities and shareholders' equity | $ | 1,452,856 | $ | 1,411,860 | |||
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income (loss) | $ | 12,653 | $ | 2,261 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation | 71,637 | 76,695 | ||||||
| Amortization reflected as operating expense | 12,967 | 12,950 | ||||||
| Amortization reflected as rent expense in cost of services | 175 | 593 | ||||||
| Bad debt expense | 758 | 886 | ||||||
| Stock based compensation expense, net of amount capitalized | 3,407 | 2,418 | ||||||
| Waived management fee | 18,606 | 18,107 | ||||||
| Deferred income taxes | (9,325 | ) | (11,954 | ) | ||||
| (Gain) loss on investments | (24 | ) | (187 | ) | ||||
| Net (gain) loss from patronage and equity investments | (1,552 | ) | (1,447 | ) | ||||
| Amortization of long-term debt issuance costs | 2,365 | 2,385 | ||||||
| Accrued interest and other | 101 | 854 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (11,060 | ) | 5,196 | |||||
| Inventory, net | (503 | ) | 25,049 | |||||
| Income taxes receivable | 16,722 | (1,908 | ) | |||||
| Other assets | 3,909 | (126 | ) | |||||
| Accounts payable | 2,486 | (40,558 | ) | |||||
| Income taxes payable | — | (435 | ) | |||||
| Deferred lease | 1,353 | 2,493 | ||||||
| Other deferrals and accruals | 2,469 | (6,478 | ) | |||||
| Net cash provided by (used in) operating activities | 127,144 | 86,794 | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Acquisition of property, plant and equipment | (62,322 | ) | (68,766 | ) | ||||
| Proceeds from sale of assets | 447 | 269 | ||||||
| Cash distributions (contributions) from investments and other | (3 | ) | 7 | |||||
| Sprint expansion | (52,000 | ) | (6,000 | ) | ||||
| Net cash provided by (used in) investing activities | (113,878 | ) | (74,490 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Principal payments on long-term debt | (24,250 | ) | (12,125 | ) | ||||
| Proceeds from revolving credit facility borrowings | 15,000 | — | ||||||
| Proceeds from credit facility borrowings | — | 25,000 | ||||||
| Principal payments on revolving credit facility | (15,000 | ) | — | |||||
| Taxes paid for equity award issuances | (2,032 | ) | (1,598 | ) | ||||
| Net cash provided by (used in) financing activities | (26,282 | ) | 11,277 | |||||
| Net increase (decrease) in cash and cash equivalents | (13,016 | ) | 23,581 | |||||
| Cash and cash equivalents, beginning of period | 78,585 | 36,193 | ||||||
| Cash and cash equivalents, end of period | $ | 65,569 | $ | 59,774 | ||||
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018, using the modified retrospective method as discussed in Note 2, Revenue from Contracts with Customers. The following table identifies the impact that the application of Topic 606 had on the Company for the three months ended June 30, 2018:
| Three Months Ended June 30, 2018 | |||||||||||||||
| Topic 606 Impact - CONSOLIDATED | |||||||||||||||
| ($ in thousands, except per share amounts) | Prior to Adoption of Topic 606 | Changes in Presentation (1) | Equipment Revenue (2) | Deferred Costs (3) | As Reported 6/30/2018 | ||||||||||
| Service revenue and other | $ | 156,267 | $ | (20,881 | ) | $ | — | $ | 2,635 | $ | 138,021 | ||||
| Equipment revenue | 1,799 | — | 14,210 | — | 16,009 | ||||||||||
| Total operating revenues | 158,066 | (20,881 | ) | 14,210 | 2,635 | 154,030 | |||||||||
| Cost of services | 48,999 | — | — | 135 | 49,134 | ||||||||||
| Cost of goods sold | 6,328 | (5,372 | ) | 14,210 | — | 15,166 | |||||||||
| Selling, general & administrative | 45,579 | (15,509 | ) | — | (155 | ) | 29,915 | ||||||||
| Depreciation and amortization | 41,117 | — | — | — | 41,117 | ||||||||||
| Total operating expenses | 142,023 | (20,881 | ) | 14,210 | (20 | ) | 135,332 | ||||||||
| Operating income | 16,043 | — | — | 2,655 | 18,698 | ||||||||||
| Other income (expense) | (8,012 | ) | — | — | — | (8,012 | ) | ||||||||
| Income tax expense (benefit) | 2,144 | — | — | 718 | 2,862 | ||||||||||
| Net income | $ | 5,887 | $ | — | $ | — | $ | 1,937 | $ | 7,824 | |||||
| Earnings per share | |||||||||||||||
| Basic | $ | 0.12 | $ | 0.04 | $ | 0.16 | |||||||||
| Diluted | $ | 0.12 | $ | 0.04 | $ | 0.16 | |||||||||
| Weighted average shares o/s, basic | 49,547 | 49,547 | |||||||||||||
| Weighted average shares o/s, diluted | 50,070 | 50,070 | |||||||||||||
(1) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million for the national commissions, previously recorded in selling, general and administrative, $18.7 million for national device costs previously recorded in cost of goods and services, and $16.9 million for the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.
(2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.
(3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. In Cable and Wireline, installation revenues are recognized over a shorter period of benefit. The deferred balance as of June 30, 2018 is approximately $53.9 million and is classified on the balance sheet as current and non-current assets, as applicable.
The following table identifies the impact that the application of Topic 606 had on the Company's Wireless operations for the three months ended June 30, 2018:
| Three Months Ended June 30, 2018 | |||||||||||||||
| Topic 606 Impact - WIRELESS | |||||||||||||||
| ($ in thousands) | Prior to Adoption of Topic 606 | Changes in Presentation (1) | Equipment Revenue (2) | Deferred Costs (3) | As Reported 6/30/2018 | ||||||||||
| Service revenue | $ | 111,515 | $ | (20,881 | ) | $ | — | $ | 2,585 | $ | 93,219 | ||||
| Equipment revenue | 1,609 | — | 14,210 | — | 15,819 | ||||||||||
| Tower and Other revenue | 3,244 | — | — | — | 3,244 | ||||||||||
| Total operating revenues | 116,368 | (20,881 | ) | 14,210 | 2,585 | 112,282 | |||||||||
| Cost of services | 33,488 | — | — | — | 33,488 | ||||||||||
| Cost of goods sold | 6,244 | (5,372 | ) | 14,210 | — | 15,082 | |||||||||
| Selling, general & administrative | 27,876 | (15,509 | ) | — | — | 12,367 | |||||||||
| Depreciation and amortization | 31,565 | — | — | — | 31,565 | ||||||||||
| Total operating expenses | 99,173 | (20,881 | ) | 14,210 | — | 92,502 | |||||||||
| Operating income | $ | 17,195 | $ | — | $ | — | $ | 2,585 | $ | 19,780 | |||||
(1) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million for the national commissions, previously recorded in selling, general and administrative, $18.7 million for national device costs previously recorded in cost of goods and services, and $16.9 million for the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.
(2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.
(3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. The deferred balance as of June 30, 2018 is approximately $53.9 million and is classified on the balance sheet as current and non-current assets, as applicable.
Non-GAAP Financial Measures
In managing our business and assessing our financial performance, management supplements the information provided by the financial statement measures prepared in accordance with GAAP with Adjusted OIBDA and Continuing OIBDA, which are considered “non-GAAP financial measures” under SEC rules.
Adjusted OIBDA is defined as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: certain non-recurring transactions; impairment of assets; gains and losses on asset sales; actuarial gains and losses on pension and other post-retirement benefit plans; and share-based compensation expense, amortization of deferred costs related to the impacts of the adoption of Topic 606, and adjusted to include the benefit received from the waived management fee by Sprint. Continuing OIBDA is defined as Adjusted OIBDA, less the benefit received from the waived management fee by Sprint. Adjusted OIBDA and Continuing OIBDA should not be construed as an alternative to operating income as determined in accordance with GAAP as a measure of operating performance.
In a capital-intensive industry such as telecommunications, management believes that Adjusted OIBDA and Continuing OIBDA and the associated percentage margin calculations are meaningful measures of our operating performance. We use Adjusted OIBDA and Continuing OIBDA as supplemental performance measures because management believes these measures facilitate comparisons of our operating performance from period to period and comparisons of our operating performance to that of our peers and other companies by excluding potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the other items described above for which additional adjustments were made. In the future, management expects that the Company may again report Adjusted OIBDA and Continuing OIBDA excluding these items and may incur expenses similar to these excluded items. Accordingly, the exclusion of these and other similar items from our non-GAAP presentation should not be interpreted as implying these items are non-recurring, infrequent or unusual.
While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the current period allocation of costs associated with long-lived assets acquired or constructed in prior periods, and accordingly may obscure underlying operating trends for some purposes. By isolating the effects of these expenses and other items that vary from period to period without any correlation to our underlying performance, or that vary widely among similar companies, management believes Adjusted OIBDA and Continuing OIBDA facilitates internal comparisons of our historical operating performance, which are used by management for business planning purposes, and also facilitates comparisons of our performance relative to that of our competitors. In addition, we believe that Adjusted OIBDA and Continuing OIBDA and similar measures are widely used by investors and financial analysts as measures of our financial performance over time, and to compare our financial performance with that of other companies in our industry.
Adjusted OIBDA and Continuing OIBDA have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. These limitations include, but are not limited to, the following:
- they do not reflect capital expenditures;
- they do not reflect the impacts of adoption of Topic 606;
- many of the assets being depreciated and amortized will have to be replaced in the future and Adjusted and Continuing OIBDA do not reflect cash requirements for such replacements;
- they do not reflect costs associated with share-based awards exchanged for employee services;
- they do not reflect interest expense necessary to service interest or principal payments on indebtedness;
- they do not reflect gains, losses or dividends on investments;
- they do not reflect expenses incurred for the payment of income taxes; and
- other companies, including companies in our industry, may calculate Adjusted and Continuing OIBDA differently than we do, limiting its usefulness as a comparative measure.
In light of these limitations, management considers Adjusted OIBDA and Continuing OIBDA as a financial performance measure that supplements but does not replace the information reflected in our GAAP results.
The adoption of the new revenue recognition standard did not impact Adjusted OIBDA.
The following tables reconcile Adjusted OIBDA and Continuing OIBDA to operating income, which we consider to be the most directly comparable GAAP financial measure, for the three and six months ended June 30, 2018 and 2017:
Adjusted OIBDA and Continuing OIBDA
| Three Months Ended June 30, 2018 | ||||||||||||||||||||
| (in thousands) | Wireless | Cable | Wireline | Other | Consolidated | |||||||||||||||
| Operating Income | $ | 19,780 | $ | 6,083 | $ | 4,793 | $ | (11,958 | ) | $ | 18,698 | |||||||||
| Impact of ASC topic 606 | (924 | ) | 4 | (25 | ) | — | (945 | ) | ||||||||||||
| Depreciation and amortization | 31,565 | 6,179 | 3,240 | 133 | 41,117 | |||||||||||||||
| Share based compensation expense | — | — | — | 1,370 | 1,370 | |||||||||||||||
| Benefit received from the waived management fee (1) | 9,558 | — | — | — | 9,558 | |||||||||||||||
| Amortization of intangibles netted in rent expense | 93 | — | — | — | 93 | |||||||||||||||
| Actuarial (gains) losses on pension plans | — | — | — | (82 | ) | (82 | ) | |||||||||||||
| Adjusted OIBDA | 60,072 | 12,266 | 8,008 | (10,537 | ) | 69,809 | ||||||||||||||
| Waived management fee | (9,558 | ) | — | — | — | (9,558 | ) | |||||||||||||
| Continuing OIBDA | $ | 50,514 | $ | 12,266 | $ | 8,008 | $ | (10,537 | ) | $ | 60,251 | |||||||||
| Three Months Ended June 30, 2017 | ||||||||||||||||||||
| (in thousands) | Wireless | Cable | Wireline | Other | Consolidated | |||||||||||||||
| Operating Income | $ | 6,352 | $ | 3,696 | $ | 5,408 | $ | (7,204 | ) | $ | 8,252 | |||||||||
| Depreciation and amortization | 35,551 | 6,090 | 3,155 | 129 | 44,925 | |||||||||||||||
| (Gain) loss on asset sales | 21 | (73 | ) | (3 | ) | (1 | ) | (56 | ) | |||||||||||
| Share based compensation expense | 364 | 206 | 86 | 193 | 849 | |||||||||||||||
| Benefit received from the waived management fee (1) | 9,167 | — | — | — | 9,167 | |||||||||||||||
| Amortization of intangibles netted in rent expense | 334 | — | — | — | 334 | |||||||||||||||
| Temporary back office costs to support the billing operations through migration (2) | 1,693 | — | — | (8 | ) | 1,685 | ||||||||||||||
| Integration and acquisition related expenses, and other | 4,734 | — | — | (446 | ) | 4,288 | ||||||||||||||
| Adjusted OIBDA | 58,216 | 9,919 | 8,646 | (7,337 | ) | 69,444 | ||||||||||||||
| Waived management fee | (9,167 | ) | — | — | — | (9,167 | ) | |||||||||||||
| Continuing OIBDA | $ | 49,049 | $ | 9,919 | $ | 8,646 | $ | (7,337 | ) | $ | 60,277 | |||||||||
________________________________
(1) Under our amended affiliate agreement, Sprint agreed to waive the Management Fees charged on both postpaid and prepaid revenues, up to $4.2 million per month, until the total amount waived reaches approximately $255.6 million, which is expected to occur in 2022.
(2) Represents back office expenses required to support former nTelos subscribers that migrated to the Sprint back office.
Segment Results
| Three Months Ended June 30, 2018 | ||||||||||||||||||||||||
| (in thousands) | Wireless | Cable | Wireline | Other | Eliminations | Consolidated | ||||||||||||||||||
| External revenues | ||||||||||||||||||||||||
| Service revenues | $ | 93,219 | $ | 28,748 | $ | 5,301 | $ | — | $ | — | $ | 127,268 | ||||||||||||
| Equipment revenues | 15,819 | 144 | 46 | — | — | 16,009 | ||||||||||||||||||
| Other | 2,000 | 2,122 | 6,631 | — | — | 10,753 | ||||||||||||||||||
| Total external revenues | 111,038 | 31,014 | 11,978 | — | — | 154,030 | ||||||||||||||||||
| Internal revenues | 1,244 | 1,097 | 7,134 | — | (9,475 | ) | — | |||||||||||||||||
| Total operating revenues | 112,282 | 32,111 | 19,112 | — | (9,475 | ) | 154,030 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Cost of services | 33,488 | 15,125 | 9,373 | 12 | (8,864 | ) | 49,134 | |||||||||||||||||
| Cost of goods sold | 15,082 | 63 | 20 | 1 | — | 15,166 | ||||||||||||||||||
| Selling, general and administrative | 12,367 | 4,661 | 1,686 | 11,812 | (611 | ) | 29,915 | |||||||||||||||||
| Depreciation amortization | 31,565 | 6,179 | 3,240 | 133 | — | 41,117 | ||||||||||||||||||
| Total operating expenses | 92,502 | 26,028 | 14,319 | 11,958 | (9,475 | ) | 135,332 | |||||||||||||||||
| Operating income (loss) | $ | 19,780 | $ | 6,083 | $ | 4,793 | $ | (11,958 | ) | $ | — | $ | 18,698 | |||||||||||
| Three Months Ended June 30, 2017 | ||||||||||||||||||||||||
| (in thousands) | Wireless | Cable | Wireline | Other | Eliminations | Consolidated | ||||||||||||||||||
| External revenues | ||||||||||||||||||||||||
| Service revenues | $ | 107,681 | $ | 26,883 | $ | 5,128 | $ | — | $ | — | $ | 139,692 | ||||||||||||
| Equipment revenues | 2,779 | 147 | 24 | — | — | 2,950 | ||||||||||||||||||
| Other | 2,439 | 1,948 | 6,229 | — | — | 10,616 | ||||||||||||||||||
| Total external revenues | 112,899 | 28,978 | 11,381 | — | — | 153,258 | ||||||||||||||||||
| Internal revenues | 1,234 | 586 | 8,195 | — | (10,015 | ) | — | |||||||||||||||||
| Total operating revenues | 114,133 | 29,564 | 19,576 | — | (10,015 | ) | 153,258 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Cost of services | 33,497 | 14,920 | 9,329 | — | (9,329 | ) | 48,416 | |||||||||||||||||
| Cost of goods sold | 4,972 | (9 | ) | 1 | — | — | 4,965 | |||||||||||||||||
| Selling, general and administrative | 29,637 | 4,867 | 1,683 | 7,521 | (686 | ) | 43,022 | |||||||||||||||||
| Acquisition, integration and migration expenses | 4,124 | — | — | (446 | ) | — | 3,678 | |||||||||||||||||
| Depreciation and amortization | 35,551 | 6,090 | 3,155 | 129 | — | 44,925 | ||||||||||||||||||
| Total operating expenses | 107,781 | 25,868 | 14,168 | 7,204 | (10,015 | ) | 145,006 | |||||||||||||||||
| Operating income (loss) | $ | 6,352 | $ | 3,696 | $ | 5,408 | $ | (7,204 | ) | $ | — | $ | 8,252 | |||||||||||
Supplemental Information
Subscriber Statistics
The following tables indicate selected operating statistics of Wireless, including Sprint subscribers, as of the dates shown:
| 6/30/2018 (3) | 12/31/2017 (4) | 6/30/2017 (4) | |||||||
| Retail PCS Subscribers - Postpaid | 780,658 | 736,597 | 732,664 | ||||||
| Retail PCS Subscribers - Prepaid (1) | 252,054 | 225,822 | 222,038 | ||||||
| PCS Market POPS (000) (2) | 7,023 | 5,942 | 6,047 | ||||||
| PCS Covered POP (000) (2) | 5,908 | 5,272 | 5,137 | ||||||
| CDMA Base Stations (sites) | 1,770 | 1,623 | 1,541 | ||||||
| Towers Owned | 193 | 192 | 195 | ||||||
| Non-affiliate Cell Site Leases | 192 | 192 | 205 | ||||||
_______________________________________________________
(1) As of September 2017, the Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts have been adjusted accordingly.
(2) "POPS" refers to the estimated population of a given geographic area. Market POPS are those within a market area which we are authorized to serve under our Sprint PCS affiliate agreements, and Covered POPS are those covered by our network. As of December 31, 2017, the data source for POPS is U.S. census data. Historical periods previously referred to other third party population data and have been recast to refer to U.S. census data.
(3) Beginning February 1, 2018 includes Richmond Expansion Area.
(4) Beginning April 6, 2017 includes Parkersburg Expansion Area.
| Three Months Ended June 30, | ||||||
| 2018 | 2017 | |||||
| Gross PCS Subscriber Additions - Postpaid | 44,629 | 40,408 | ||||
| Net PCS Subscriber Additions (Losses) - Postpaid | 5,797 | 15,514 | ||||
| Gross PCS Subscriber Additions - Prepaid (1) | 33,840 | 35,103 | ||||
| Net PCS Subscriber Additions (Losses) - Prepaid (1) | 1,863 | 7,267 | ||||
| PCS Average Monthly Retail Churn % - Postpaid | 1.67 | % | 2.00 | % | ||
| PCS Average Monthly Retail Churn % - Prepaid (1) | 4.25 | % | 4.92 | % | ||
_______________________________________________________
(1) As of September 2017, the Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts and churn % have been adjusted accordingly.
The subscriber statistics shown above include the following:
| February 1, 2018 | April 6, 2017 | May 6, 2016 | |||||||
| Richmond Expansion Area | Parkersburg Expansion Area | nTelos Area | |||||||
| PCS Subscribers - Postpaid | 38,343 | 19,067 | 404,965 | ||||||
| PCS Subscribers - Prepaid (1) | 15,691 | 4,517 | 154,944 | ||||||
| Acquired PCS Market POPS (000) | 1,082 | 511 | 3,099 | ||||||
| Acquired PCS Covered POPS (000) | 602 | 244 | 2,298 | ||||||
| Acquired CDMA Base Stations (sites) (2) | 105 | — | 868 | ||||||
| Towers | — | — | 20 | ||||||
| Non-affiliate Cell Site Leases | — | — | 10 | ||||||
_______________________________________________________
(1) Excludes Lifeline subscribers.
(2) As of June 30, 2018 we have shut down 107 overlap sites associated with the nTelos Area.
The following table shows selected operating statistics for Cable as of the dates shown:
| June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||
| Homes Passed (1) | 185,016 | 184,910 | 184,834 | ||||||
| Customer Relationships (2) | |||||||||
| Video Users | 42,483 | 44,269 | 46,014 | ||||||
| Non-video customers | 35,773 | 33,559 | 31,291 | ||||||
| Total customer relationships | 78,256 | 77,828 | 77,305 | ||||||
| Video | |||||||||
| Customers (3) | 44,800 | 46,613 | 48,248 | ||||||
| Penetration (4) | 24.2 | % | 25.2 | % | 26.1 | % | |||
| Digital video penetration (5) | 76.9 | % | 76.2 | % | 81.5 | % | |||
| High-speed internet | |||||||||
| Available Homes (6) | 185,016 | 184,910 | 184,834 | ||||||
| Users (3) | 65,466 | 63,918 | 61,947 | ||||||
| Penetration (4) | 35.4 | % | 34.6 | % | 33.5 | % | |||
| Voice | |||||||||
| Available Homes (6) | 185,016 | 182,379 | 182,303 | ||||||
| Users (3) | 22,882 | 22,555 | 22,092 | ||||||
| Penetration (4) | 12.4 | % | 12.4 | % | 12.1 | % | |||
| Total Revenue Generating Units (7) | 133,148 | 133,086 | 132,287 | ||||||
| Fiber Route Miles | 3,426 | 3,356 | 3,301 | ||||||
| Total Fiber Miles (8) | 133,702 | 122,011 | 114,366 | ||||||
| Average Revenue Generating Units | 132,287 | 132,759 | 132,829 | ||||||
(1) Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information.
(2) Customer relationships represent the number of billed customers who receive at least one of our services.
(3) Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above.
(4) Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate.
(5) Digital video penetration is calculated by dividing the number of digital video users by total video users. Digital video users are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video user.
(6) Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area.
(7) Revenue generating units are the sum of video, voice and high-speed internet users.
(8) Total Fiber Miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.
The following table shows selected operating statistics for Wireline as of the dates shown:
| June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||
| Telephone Access Lines | 17,017 | 17,933 | 18,077 | ||||||
| Long Distance Subscribers | 8,930 | 9,078 | 9,139 | ||||||
| Video Customers (1) | 4,850 | 5,019 | 5,180 | ||||||
| DSL and Cable Modem Subscribers | 14,694 | 14,665 | 14,605 | ||||||
| Fiber Route Miles | 2,099 | 2,073 | 2,017 | ||||||
| Total Fiber miles (2) | 157,008 | 154,165 | 146,967 | ||||||
_______________________________________________________
(1) Wireline’s video service passes approximately 16,500 homes.
(2) Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.