Overview
Consolidated Communications Holdings, Inc. (NASDAQ:CNSL) is a leading broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a service area in over 20 states. The company operates an advanced fiber network spanning over 61,000 fiber route miles, enabling it to offer residential high-speed Internet, video, phone and home security services, as well as a comprehensive business product suite.
Business Overview
Consolidated Communications is focused on expanding its fiber broadband services and upgrading data speeds to offer highly competitive fiber products. The company's strategic investment with Searchlight Capital Partners L.P. in 2020 provided additional capital that has enabled it to accelerate its fiber expansion plans and deliver significant benefits to its consumer, commercial and carrier customers.
As part of its multi-year fiber expansion plan, Consolidated Communications plans to upgrade approximately 1.6 million passings to fiber across select service areas to enable multi-Gig capable services to these homes and small businesses. In 2024, the company expects to upgrade approximately 150,000 homes and small businesses. During the three months ended March 31, 2024, the company upgraded approximately 10,800 passings and added approximately 18,800 consumer fiber Gig-capable subscribers. As of March 31, 2024, approximately 47% of the company's passings were at least 1 Gig capable, compared to 22% at December 31, 2021.
Consolidated Communications' Fidium Fiber, its Gigabit consumer fiber internet product, reinforces the company's broadband-first strategy. Fidium plans offer symmetrical speeds from 50 Mbps to 2 Gbps over the latest WiFi 6 technology with no data caps. The company expects to continue expanding the availability of Fidium Fiber further into communities within its markets. In February 2023, the company launched Fidium@Work and expanded its Fidium Fiber service to small businesses everywhere Fidium internet is available.
The company's focus on driving fiber connectivity, achieving data services growth and standardizing its commercial product portfolio has enabled it to deliver differentiated solutions targeting customers ranging from small businesses to large enterprises and carriers. By leveraging its advanced fiber network, Consolidated Communications can tailor its services to meet the specific needs of its business customers.
Financials
For the full year 2023, Consolidated Communications reported annual net income of -$250,514,000, annual revenue of $1,110,120,000, annual operating cash flow of $114,087,000, and annual free cash flow of -$400,947,999.
During the three months ended March 31, 2024, the company reported net revenues of $274,675,000, a decrease of 1% compared to the same period in 2023. This decline was primarily driven by decreases in voice services, video services and network access revenues, partially offset by growth in broadband services.
Consumer broadband services revenues increased $11.9 million, or 18%, during the three months ended March 31, 2024 compared to the same period in 2023. This growth was driven by price increases and the continued expansion of the company's fiber Internet services, as fiber data connections increased and offset the decline in copper data connections. Total consumer data connections increased 8% as of March 31, 2024 compared to the same period in 2023.
Commercial data services revenues increased $1.6 million, or 3%, during the three months ended March 31, 2024 compared to the same period in 2023, due to continued growth in dedicated Internet access and fiber Internet services, partially offset by declines in Metro Ethernet and VoIP phone services.
Carrier data and transport services revenues decreased $1.8 million, or 5%, during the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a decrease in Ethernet services as a result of customer churn. Colocation and cellular backhaul revenue also declined due to a reduction in pricing of recent contract renewals with wireless backhaul partners.
Operating expenses decreased $13.2 million, or 4%, during the three months ended March 31, 2024 compared to the same period in 2023. This was primarily driven by decreases in video programming costs, federal and state Universal Service Fund contributions, and employee and contract labor costs, partially offset by increases in professional fees, legal fees, property and real estate taxes, and software maintenance costs.
Liquidity
As of March 31, 2024, Consolidated Communications had cash and cash equivalents of $7,363,000 and a current ratio of 0.93. The company's net working capital deficit improved $42.2 million as of March 31, 2024 compared to December 31, 2023, primarily due to a decline in accounts payable, accrued expenses and accrued compensation.
The company's most significant uses of funds for the remainder of 2024 are expected to be for capital expenditures and interest payments on its indebtedness. Consolidated Communications has historically funded certain core network capacity equipment with finance leases and intends to continue such arrangements with its leasing partners.
The refinancing of the company's capital structure in recent years, including the Fifth Amendment to its Credit Agreement in October 2023, availability of approximately $111.4 million on its revolving credit facility as of March 31, 2024, $80.0 million undrawn under the Term Loan Agreement, and net proceeds from expected asset divestitures in 2024 provide Consolidated Communications with near-term financial and operational flexibility.
Regulatory Matters
Consolidated Communications' revenues are subject to broad federal and/or state regulations, including those related to local telephone service, network access service and toll service. The company participates in various federal and state subsidy programs, such as the Rural Digital Opportunity Fund (RDOF) and the Affordable Connectivity Program (ACP), which provide funding to promote widely available, quality telephone service at affordable prices in rural areas.
In April 2019, the FCC announced plans for the RDOF, the next phase of the Connect America Fund program. Consolidated Communications won 246 census block groups serving in seven states in the 2020 RDOF auction. The company began receiving RDOF funding in January 2022.
The Infrastructure Investment and Jobs Act, signed in November 2021, included $65.0 billion to support broadband infrastructure deployment and access across the United States. The Act allocated $42.5 billion for the Broadband Equity, Access, and Deployment (BEAD) program, which is administered by the National Telecommunications and Information Administration. The precise terms under which BEAD program grants will be awarded to ISPs, including Consolidated Communications, are expected to vary from state to state.
Merger Agreement
On October 15, 2023, Consolidated Communications entered into an Agreement and Plan of Merger with Condor Holdings LLC, an affiliate of Searchlight Capital Partners L.P. Under the terms of the agreement, Searchlight will acquire all outstanding shares of Consolidated Communications' common stock for $4.70 per share in cash. The proposed transaction is expected to close by the first quarter of 2025, subject to regulatory approvals and other customary closing conditions.
Risks and Challenges
Consolidated Communications faces several risks, including significant competition in all parts of its business, the ability to adapt to rapid technological changes, shifts in product mix that may result in a decline in operating profitability, and the potential impact of public health threats like the COVID-19 pandemic. The company also relies on continued support from various federal and state subsidy programs, and disruptions to its networks and infrastructure could lead to customer losses and additional expenses.
Outlook
Despite these challenges, the company remains focused on executing its multi-year fiber expansion plan and transforming from a copper-based telecommunications provider to a fiber broadband provider. Consolidated Communications expects to continue investing in the enhancement and expansion of its fiber network to retain and acquire more customers through a broader set of products and an expanded network footprint.
Conclusion
Consolidated Communications is navigating industry-wide trends, such as the decline in voice services and access lines, while strategically investing in its fiber network to drive long-term growth. The company's fiber expansion plan, enhanced product offerings, and focus on commercial and carrier customers position it well to capitalize on the increasing demand for high-speed broadband services. However, the company faces ongoing competitive and regulatory challenges that will require careful management. Investors should closely monitor Consolidated Communications' progress in executing its fiber-first strategy and its ability to maintain financial flexibility amid industry headwinds.