10-Q: Consolidated Communications Reports Q2 2024 Results Amidst Pending Merger with Searchlight Capital

Consolidated Communications announced its Q2 2024 financial results, showing a net loss but improved Adjusted EBITDA, while awaiting regulatory approvals for its merger with Searchlight Capital.

Summary

• Consolidated Communications Holdings, Inc. reported a net loss of $54.8 million for the three months ended June 30, 2024, compared to a net loss of $108.1 million for the same period in 2023.
• For the six months ended June 30, 2024, the net loss was $90.2 million, compared to $145.1 million in 2023.
• Adjusted EBITDA increased to $84.2 million for the quarter and $172.6 million for the six-month period, up from $76.9 million and $152.3 million, respectively, in the prior year periods.
• Operating revenues totaled $268.7 million for the quarter and $543.4 million for the six-month period, a slight decrease from $275.2 million and $551.3 million, respectively, in 2023.
• The company is currently undergoing a merger with Condor Holdings LLC, an affiliate of Searchlight Capital Partners, with an expected closing in late Q4 2024 or early Q1 2025.
• The merger is subject to regulatory approvals, including those from the Federal Communications Commission and state public utility commissions.
• Consolidated is focusing on expanding its fiber broadband services, with plans to upgrade approximately 150,000 homes and small businesses in 2024.
• The company's fiber build plan includes upgrading approximately 1.6 million passings across select service areas to enable multi-Gig capable services.
• As of June 30, 2024, approximately 49% of the company's passings were at least 1 Gig capable.
• Video services have been discontinued in all markets as of the end of July 2024 as part of the company's plan to simplify product offerings and focus on fiber.
• The company has entered into term sheets to facilitate loans of up to an aggregate amount of $140.0 million, contingent upon satisfaction of certain conditions including a successful fund raising by the lender.

Sentiment

Score: 5

Explanation: The sentiment is neutral. While the company is reporting a net loss, there are positive indicators such as increased Adjusted EBITDA and a focus on fiber expansion. The pending merger adds uncertainty but also potential for future growth.

Positives

• Adjusted EBITDA increased to $84.2 million for the quarter and $172.6 million for the six-month period, up from $76.9 million and $152.3 million, respectively, in the prior year periods.
• Net loss improved from $108.1 million in Q2 2023 to $54.8 million in Q2 2024.
• Consumer broadband services revenues increased $10.1 million and $22.0 million during the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023.
• The company is focused on expanding its fiber broadband services, with plans to upgrade approximately 150,000 homes and small businesses in 2024.
• Approximately 49% of the company's passings were at least 1 Gig capable as of June 30, 2024.

Negatives

• The company reported a net loss of $54.8 million for Q2 2024.
• Operating revenues decreased slightly to $268.7 million for the quarter and $543.4 million for the six-month period.
• Voice services revenues continue to decline due to industry trends.
• Network access services revenues decreased $1.7 million and $3.6 million during the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023 primarily due to a decline in end user access revenue as a result of a reduction in funding rates for State Universal Service Funds (USF) for Texas.

Risks

• The merger with Searchlight Capital is subject to regulatory approvals and may not be completed in a timely manner or at all.
• The company faces significant competition in all parts of its business.
• The company's ability to fund capital expenditures required for its operations is a risk.
• The company's ability to obtain and maintain necessary rights-of-way for its networks is a risk.
• The company's ability to obtain necessary hardware, software and operational support from third-party vendors is a risk.
• The company's ability to attract and/or retain certain key management and other personnel in the future is a risk.
• The company's ability to generate sufficient cash flows from operations in the future is a risk.
• The company may be unable to access the cash flows of its subsidiaries since certain of its subsidiaries are parties to credit or other borrowing agreements, or are subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future.

Future Outlook

The company expects to continue executing its multi-year fiber growth plan and transforming into a fiber broadband provider, with plans to upgrade approximately 150,000 homes and small businesses in 2024. The merger with Searchlight Capital is expected to close in late Q4 2024 or early Q1 2025, pending regulatory approvals.

Industry Context

Consolidated Communications is operating in a highly competitive telecommunications industry, facing challenges such as declining voice service revenues and increasing demand for high-speed broadband. The company's focus on fiber expansion aligns with industry trends towards higher bandwidth and improved connectivity. The merger with Searchlight Capital is expected to provide additional capital and resources to support the company's strategic initiatives.

Comparison to Industry Standards

• While specific competitor data isn't provided, companies like Frontier Communications and Lumen Technologies are also undergoing transformations to focus on fiber deployment.
• Consolidated's fiber expansion plans to reach 1.6 million passings are comparable to similar initiatives by other regional telecom providers.
• The discontinuation of video services mirrors a broader industry trend as consumers shift towards streaming platforms, similar to decisions made by Verizon and AT&T in certain markets.

Legal Proceedings

• Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (CCPA) and Consolidated Communications Enterprise Services, Inc. (CCES), have, at various times, received Assessment Notices and/or Audit Assessment Notices from the Commonwealth of Pennsylvania Department of Revenue (DOR) increasing the amounts owed for the Pennsylvania Gross Receipts Tax, and have had audits performed for the tax years 2008 through 2018 (CCPA and CCES) and 2019 through 2020 (CCPA).

Related Party Transactions

• On March 21, 2024, the Company, through certain of its wholly-owned subsidiaries, and Searchlight, as lender entered into a Term Loan Agreement (the Loan Agreement), which consists of delayed draw term loans in the aggregate amount of $80.0 million (the Loan).

Stakeholder Impact

• Shareholders will be impacted by the pending merger with Searchlight Capital, with each share of common stock being converted into the right to receive $4.70 per share.
• Employees may be affected by the ongoing business simplification and cost savings initiatives.
• Customers will benefit from the expansion of fiber broadband services and improved connectivity.
• Suppliers and creditors may be impacted by the company's financial performance and debt levels.

Next Steps

• Continue to execute the multi-year fiber growth plan.
• Obtain regulatory approvals for the merger with Searchlight Capital.
• Upgrade approximately 150,000 homes and small businesses to fiber in 2024.
• Monitor and manage debt levels and covenant compliance.

Key Dates

Keywords

Consolidated Communications, Searchlight Capital, Merger, Fiber Broadband, Q2 2024, Financial Results, EBITDA, Net Loss, Operating Revenue, Regulatory Approvals, Debt, Capital Expenditures