Good day and thank you for standing by. Welcome to the ATN International Second Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mr. Justin Benincasa, Chief Financial Officer of the Company. Please go ahead, sir.

Great. Thank you, operator, and good morning, everyone. Today, we'll be reviewing our second quarter 2022 earnings results. With me here is Michael Prior, ATN's Chief Executive Officer; Michael will be providing an update on the business and strategy as well as high-level overview on our quarterly results. I will cover the relevant financial information and provide additional color where necessary. As a reminder, we released our second quarter earnings press release last night after market closed. Investors can find the release and summary slides on this call or on our Investor Relations website. Before I turn the call over to Michael, I'd like to point out that this call, our press release and slides contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures, and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K provided to the SEC. And I will now turn the call over to Michael for his prepared remarks.

Thank you, Justin, and welcome, everyone, to our second quarter 2022 earnings call. We delivered solid results in the second quarter driven by strong performances across our business and geographies. In line with our three-year plan, we are making progress in several business areas to lay the foundation for our long-term growth and expansion. A few highlights from the quarter helped to illustrate this point. First, we have completed our initial year of operating Alaska Communications. We are pleased to announce that full integration is complete, with the acquisition, expanding our overall U.S. footprint, and adding roughly 50% to our total segment revenues. And I am grateful for the work of the ATN and Alaska teams in achieving this milestone. It was a large and complex undertaking, and we don't take success for granted. Second, we won a grant for approximately $10 million to deliver connectivity to homes and businesses in an area of Northern Arizona. Third, we invested more in increasing our infrastructure footprint and subscriber count in a number of markets and in particular, Guyana. And last, but not least, we announced yesterday that we have entered into an agreement to acquire the largest private broadband provider in New Mexico, about which I will say more shortly. As noted on prior calls, 2022 marks the first year under our new growth strategy. This strategy is underpinned by our twin pillars of Glass and Steel, and being first-to-fiber. Glass and Steel represents our goal to build and own modern core digital infrastructure. While being first-to-fiber, expresses our commitment to being the first to bring high-speed connectivity to a market. Our growth strategy complements and enhances our differentiated approach, focused on entering and servicing rural and remote markets with high connectivity demand. Many of these markets are characterized by lower…

Great. Thanks, Michael. In the second quarter of 2022, total consolidated revenues were $179.5 million, up 45% year-over-year. Operating income was $1.7 million versus $2.9 million last year, and adjusted EBITDA was $39.2 million, up 55% year-over-year. The increase in revenue and adjusted EBITDA was mostly due to the addition of Alaska, while the year-over-year decline in operating income was due to the increases in network operating costs and sales and marketing expenses in our international segment, and higher depreciation expense related to the acquisition of Alaska. Now turning to our segment breakdown. In international, revenues were $88.4 million, increasing 3% year-over-year. Mobile subscriber growth and higher carrier service revenues from increased travel to the U.S. Virgin Islands and Bermuda all contributed to the segment revenue growth. These revenue increases were partially offset by the scheduled step-down in federal high-cost revenue support subsidies for the U.S. Virgin Islands, which we've noted previously. The next step down of $1.4 million is scheduled to occur in the third quarter of 2022. Adjusted EBITDA for the segment was $27.1 million in the quarter, down slightly from $28.4 million a year ago. This was due to higher operating costs, which offset the increase in segment revenues and the impact of the federal support step down as previously mentioned. In addition, we're investing more in sales and marketing and customer support capabilities as well as network enhancement as we aim to grow the size and quality of our subscriber base at a more rapid pace. In our U.S. segment, revenues were $91.1 million in the quarter, more than doubling once again on a year-over-year basis due to our consolidation of Alaska's results. In the U.S., approximately 70% of our service revenues were derived from business and carrier services. FirstNet construction contributed $3.3 million to the…

Thank you, Justin. We delivered a strong performance across our businesses and markets in the second quarter. Both at home and abroad, we continue to strengthen our operations and position ourselves for enduring growth. Additionally, we are pleased to have announced the acquisition of Sacred Wind Enterprises, and we look forward to working with the team to deliver more opportunity through our solutions in the days ahead. And now operator, we'd like to open it up for questions.

[Operator Instructions] Our first question or comment comes from the line of Hamed Khorsand from BWS Financial.

Could you just talk about the opportunistic approach that you have with the Sacred Wind. What made you -- what made it so compelling to actually act now? And what your plans are with this acquisition?

Yes. I think really, this is something we call kind of a bolt-on acquisition. And the advantage of it is it really helps us accelerate the expansion of the transformation we've talked about in our forward business strategy in the Lower 48, and in that region. So it's broadband infrastructure assets in an adjacent market. We now love them. We think there's a good mesh of culture and team. And we think it's a great strategic complement for our subsidiary in that area. And then they also have an attractive pipeline in an area that we're interested in pursuing. They've done a good job of developing fiber growth development. They are also as -- our teams quite adept at winning solutions where it's public-private partnerships. So there are some subsidies and incentives to connect people and communities. So it's a nice mesh with what we're trying to do with that business, and we think it's really an acceleration of the organic plan.

Okay. And then on that notice, what are your goals with CapEx? Will it continue to be basically at the same level of EBITDA for the next couple of years with all the grant opportunity out there? Or could the Company begin to generate free cash flow again?

Well, I think we'll stand by that broader guidance we've given about what we're expecting and where that leaves us, from a balance sheet standpoint. And we talked a lot about that a couple of quarters ago. But one thing I would say on it is that the -- with these grants, they're largely not impactful to sort of net CapEx, right? So there can be sometimes as in this Arizona thing we have somewhat -- something like 10% match on our part. But the grants themselves -- and I think some of them in the future probably will come through is contra CapEx or something, so it might actually serve to reduce it. But it is a critical part of where we want to expand and how we want to expand. And maybe the sort of higher level answer to your question is it's just -- in a number of our markets, we think now is the time, right? Now is the time to be first-to-fiber to provide the needs. There's just really strong demand. So I think we will continue to invest in that program.

Okay. And my last question is, are you able to comment on the media reports that you hired Goldman Sachs?

No. We don't -- as many companies, we have a long-standing corporate policy not to comment on those types of rumors.

Our next question or comment comes from the line of Ric Prentiss from Raymond James.

I want to follow on the lines. So there's a lot of award and grant process out there. Can you update us on what's happening in the last year? I think we saw some headlines that they've been moving forward on some funding of projects. Have you been successful there? Maybe an update on the FCC away in pie. I think there's been some progress there as far as what the government was thinking about. Just other states in general, how should we think about where you're at, teeing up awards and grants?

Sure. I'll do the drip on replace last because that's somewhat complex. In terms of larger grants, and your question on Alaska, we have -- we've had some success. We've launched service actually on some of the earlier programs there. But I would say that there's more sort of pending in what we think is pretty late stages of approval and review in dollar amount of grant than we have now. And as I'm sure you appreciate, but it's worth emphasizing for everybody is, I would be careful at looking at dollar value of grants and translating that on a level basis into economic impact. When we -- some of the programs we've applied to do -- or solutions we've applied to deliver in places like Alaska are very expensive to do. And therefore, the grant or the subsidy would -- could be very large. That doesn't mean that it's larger than in any one situation than, say, a $10 million grant we just mentioned to run fiber to 4,000 homes. So we look at these things in terms of the total cost of ownership to deliver over time, and what we can expect to receive. But I just want to emphasize that. The second thing I would add to that is that I think we're early in it because as you know, the beat to program, the $42 billion, that really is yet to be -- it's just early innings of grants flowing out of that. That's coming through the stage -- from the federal government through the states and sometimes smaller entities, counties, et cetera, to then greenlight projects and make awards. So I think there's going to be quite a lot of activity in that for the next number of quarters, and we're certainly participating in multiple markets. I'll pause there if you want to have a follow-up on that. And then otherwise, I can answer the rip and replace question.

No. Let's go on.

Okay. So as you probably saw in the news, we were counting all our subsidiaries approved for something like $525 million of cost estimates in -- on replace and remove, so -- as we call it. And the approved prorated allocation for that was about 40% of that amount. It's a little over $200 million. And so the way it works -- without getting into too much complexity, first of all, we're very pleased because the approval was very close to what we submitted. So we're glad our team did a good job. Now this is a reimbursement program, and we're ready to step up to the obligations, and participate in the program. In terms of the gap in funding, right now, I believe, at least committee in The House had approved a bill to fill the gap, which would fund all the approved -- approvals at the full amount, or more or less. And I think we're hopeful. What we've seen so far is there seems to be strong bipartisan support. This is a program that was championed by both sides of the aisle as important for the country. So we expect it to get done, but we're still evaluating that. And we're also -- there's also plenty of discussions between us and other participants and the FCC on exactly how all the timing works for application -- for when you start replacing, when you reimburse and so on. And so we're still working through those details and getting clarifications.

Roughly any idea of the time frame of the replacement ahead of the reimbursement?

No. You mean in terms of cash flow? Are you talking about cash flow, cash out and cash in?

Yes. And is it -- would it be like a six-month lag, a one-year lag, a quarter lag?

Yes. I don't know, but that's obviously something we're...

We're planning.

Yes. We're really actively trying to manage that, Ric, because these are obviously big numbers, right? So how much the timing of the ins and outs is critical and something we're working through right now. And every participant is doing the same. The other thing I should say, though, is some of our vendors -- some of the bigger vendors, bigger names that would participate in this, we are putting in place or have put in place in the contracts a sort of pass-through, which is when we get paid, you get paid. So we can alleviate that with those sorts of agreements as well.

That makes sense. Okay. On another line, operational things came in kind of where we were looking for, but the corporate other category did come in a little higher on an EBITDA loss standpoint. How should we think about what happened in the quarter? What's the right run rate as we think about that kind of corporate other line item? And what all goes into there?

Yes. I mean the biggest drivers in that line item are the shared service organizations and corporate. And I would say Q1 was lower than we -- lower -- a lower quarter. Q2 was a higher quarter, and that was some of the noncash comp charges. But what I would think about going forward is we'll be a little bit under the $8 million run rate, I think, in the back half of the year -- or the quarter. Q1 was lower. And so -- like I said, a little under the $8 million -- under $8 million or so. A little under $8 million going forward.

And as you guys calculate towards adjusted EBITDA, do you take out all the noncash items anyway then when you get to adjusted EBITDA?

No. Not on the comp, we don't take out. We take out transaction-related charges.

Got you. Got you. So if we wanted to get to a cash EBITDA, you'd have to make some adjustments.

Yes. And with the noncash charge. It would be the noncash comp charges.

Yes. Yes. Okay. Last one for me, actually just to, sorry. There's a lot of companies that are obviously pursuing a first-to-fiber strategy. So very important to stay aware of your marketplaces to make sure there's not multiple people trying to be first to market. How are you guys monitoring the markets you're in? And then as you think about some of these other companies that are involved in a first-to-fiber strategy, a lot of those are private companies. What are the advantages to being public company versus the advantages of being a private company going after these investment pursuits?

I'm not sure -- from an operational standpoint, I'm not sure there's any of the deals. And for some of the smaller ones, there might be some disadvantages if you're trying to work it with the government programs. But just the difference typically is we have more sort of current explaining and updating to do of our long-term plans and what the value is we see than a private company that's received financing to do just that. So that's the main difference. But in terms of your broader question of how do we keep an eye on it, I would say very carefully, right? We've always been very sensitive to the sort of risk of oversupply of infrastructure to a market, right? So we largely gone after places with undersupply. And we're -- we continue to watch very carefully what else might be done. In most of our markets, we've been there for a long time. We have a very good understanding of what's going on and who the players are. It's a little more tricky if you read the headlines in some of the mainland U.S. markets to ascertain. But when you drill down, again, we pretty much know the local players. And we see the announcements by both larger players and small. But we'll be very vigilant. It's always a key part of our thought process, we greenlight projects or not.

Okay. And the last one for me then was on the New Mexico deal with Sacred Wind. The purchase price looks like what about a 5.7 multiple, if there's $57 million of cash and assumed debt, and about $10 million of estimated annual EBITDA, which seems a bit low for a cable property. There's rumors in the marketplace of Altice maybe selling suddenly for some pretty high multiples. How should we think about the multiple you paid? What's the growth you expect out of that project? And is there a need then for some significant CapEx investment?

Sure. So one thing I can say, right -- so if you look at the information we provided earlier that the cash and the debt, $25 million in cash and roughly $32 million in debt assumed. There's also some -- the sellers are also going to take a small minority stake in the combined entity. There is some earn-out mechanisms or opportunities for the sellers as well. But what I can say to give you a value sense, and then I'll talk about the opportunity. From a value standpoint, the way we look at it in the mix of consideration, it's pretty consistent with where we are trading today, and that's before synergies. And the growth is really part of the synergy. So I think there's two layers of that. There definitely are some cost synergies available but this is more about revenue. It's about developing their pipeline. Now they have a track record of doing that pretty much with organic cash flow, and a lot of it, we think, can be done with that, but there may be some opportunities as we integrate to accelerate or to broaden the footprint, and that might require additional CapEx. But we're not sort of updating any of that at this point in time.

And kind of the growth rate you see in those markets?

I think there's a good one. So they are not a cable provider. They were -- their origins were as a small lack. And so they have some copper plant, and then they started building out fiber in both existing and new communities. So there is some copper/fiber conversion potential that we will examine but we're probably more focused on the expansion in new fiber builds. And so for the size of the business, I think again, it's going to be integrated with our Commnet subsidiary, but we think it could be a significant contributor to growth.

Our next question or comment comes from the line of Greg Burns from Sidoti.

Just when we think about your fiber investments, the penetration on the number of homes passed. Is the focus now just on expanding the network, and then you'll turn to kind of increase penetration. Like how should we think about the trajectory of broadband penetration in the markets that you're covering? And where do you think you can get that to? It looks like about 35% or so now. How high do you think that could go over time?

Yes. I think we will continue to -- first of all, we will continue to add to the total number of broadband customers we expect. Most of what we had really will be what we call the high-speed data. And we say that 100 megabits downloads and up. In most cases, well above that. We -- so we have two things that we're doing that you appreciate is, one, we are taking our existing broadband customers at lower speeds and converting them to a higher speed networks and higher speed services. And there's plenty of that left to do in the market, and that's why we provide those metrics. And then on top of that, there will be the new markets, add-ons, new areas, new communities that will pretty much come straight into the high-speed data portion of it. So I'm not going to give you sort of a target penetration rate is it just we expect to continue to grow that number, and it's a key metric for us.

Okay. And then is there any update on Guyana? Any I, don't know, changes in the trajectory of that market? Anything you could provide there by way of an update?

Yes. I think I would say on the positive side, and it largely is positive, the continued growth and buildout of fiber. That's going well. The costs are in line with our expectation on the actual builds. The take rates continue to be strong. The ARPUs, they come in at, continue to be strong. That's all positive. And on the mobile side, we continue to grow mobile subscribers in that market, and we think we have more room to run, both because of macroeconomic growth and population growth that we expect to see and end market share. The one thing to say there -- though, there's two. On the other side of that, but more minor is costs are running high, and some of that is having both the legacy and the newer stuff overlapping each other. So there's opportunity in the future to optimize that. And it's also -- as you build in new communities and so on, you have the higher fixed cost to start. You have the marketing and sales initiatives that go rapidly load people onto the new services. And at the beginning that's -- those -- that's not great for margins. But as you grow, every new sub, every new customer comes in at a higher incremental margin. So that will ride itself in our expectation. And then -- the last thing to notice is that the ARPUs are a little low still, and we're a little lower on the mobile side. Again, those to -- we expect those to grow over time. In fact, we expect them to grow significantly over the next few years, but there is some probably economic work going on down through -- in the time being in terms of people's purchasing practice.

I'm not showing any further questions in the queue at this time. I'll now turn it back over to Michael for any closing remarks.

All right. Thank you, operator. Appreciate that, and thank you all for joining us this morning. We genuinely appreciate your time and interest in ATN.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.