Cable One Inc

NYSE:CABO

Earnings Call Transcript 2019-Q4

[Operator]

Good day, and welcome to the Cable One Earnings Report Q4 2019 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Steven Cochran. Please go ahead.

[Steven Cochran, executive]

Thank you, Sara. Good afternoon, and welcome to Cable One's Fourth Quarter and Full Year 2019 Earnings Call. We're glad to have you join us as we review our results.

Before we proceed, I'd like to remind you that today's discussion may contain forward-looking statements relating to future events and expectations. You can find factors that could cause Cable One's actual results to differ materially from these projections listed in today's earnings release and in our recent SEC filings. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net.

Joining me on today's call is our President and CEO, Julie Laulis.

With that, let me turn the call over to Julie.

[Julia Laulis, executive]

Thank you, Steven. Good afternoon, and thank you for joining us for today's call. I'll kick off my remarks by sharing some highlights from 2019 before providing a look ahead to 2020, then Steven will give a full recap of our financial performance.

I'm exceptionally proud of our performance in 2019. It was a very busy year, and I would like to take a moment to thank our associates. Without their hard work and dedication, we would not have been able to accomplish so much this past year.

To briefly recap some highlights, 2019 saw us rebrand our consumer-facing business from Cable One to Sparklight. This was not simply a name change, rather it embodies our transformation from a traditional cable company to an HSD-centric provider that seamlessly connects customers to the things they care about most.

We continue to work to further bridge the digital divide in rural communities across our footprint. As you may remember, in 2016, we launched gigabit speeds across our legacy Cable One footprint. In 2019, we deployed gig service in more than 200 communities in our NewWave markets, and we now offer gig service to more than 97% of our homes passed.

On the subject of NewWave, I'm pleased to share that we completed virtually all integration activities by the close of 2019, which was ahead of our original schedule. This sets us up nicely to realize the additional adjusted EBITDA growth and margin expansion in those markets as we fully capture the run rate synergies from the acquisition.

On the M&A front, 2019 was an active year. In January 2019, we acquired Clearwave Communications, which expanded our fiber footprint and enterprise business segments. Then in October, we finalized our purchase of Fidelity Communications, data, video and voice business. Both companies are in excellent fit in many ways.

In Fidelity's case, we share similar strategies, customer demographics and products. Meanwhile, Clearwave has a premier fiber network that further enables us to supply customers with enhanced business services solutions. As we go through our numbers later in the call, keep in mind that we are reporting on our consolidated results, including Clearwave and Fidelity unless otherwise noted.

Looking ahead to 2020, we will continue to follow our balanced strategy to deploy cash and grow the business. As we've said before, that entails a combination of looking for broadband-related acquisition and investment opportunities in rural markets as well as capital projects intended to drive long-term growth.

We are pleased to have once again delivered a quarter of strong performance, including year-over-year increases in total revenues of 18.1% and adjusted EBITDA of 24%. Our adjusted EBITDA margin increased 240 basis points year-over-year to 49.7% for the fourth quarter of 2019. These results illustrate that our long-term business strategy and focused execution continue to consistently deliver both top line and adjusted EBITDA growth as well as expanding margins.

While we expect to see continued margin expansion over time, we do not anticipate that it will necessarily be consistent quarter-to-quarter as we make further operational and strategic investments. We experienced an 18.9% increase in quarterly residential HSD revenues, driven by a 15.7% increase in residential HSD units together with a 2.6% increase in residential HSD ARPU.

Excluding acquired operations, residential HSD unit and ARPU growth was 3.6% and 4.6%, respectively, leading to a residential HSD revenue growth of 8.7%. Quarterly revenues from business services were up 41.6% year-over-year or 10.2%, excluding the impact of Clearwave and Fidelity. We're very proud of the work our business services team is doing to achieve these results.

We've spoken before about our pricing and packaging changes that were implemented at the beginning of 2019, which were designed to help fuel growth through customer choice. We continue to see customer need for reliable, value-priced and flexible HSD service, and our simplified pricing and packaging has exceeded our expectations in serving that need.

In the fourth quarter, our average data usage per customer increased more than 30% versus the prior year to roughly 350 gigabits a month. During that same period, our $40 unlimited data option increased to nearly 20% of new sell-ins and customers are self-selecting into our $65 200 meg HSD tier at a rate of almost 2:1 versus our $55 starter tier. The impact of our customers choosing these plans combined with their value proposition has caused a decrease in our churn rates and improved subscriber growth.

With a full year of new pricing and packaging behind us, excluding Fidelity, our residential HSD organic unit growth accelerated from 2.7% in 2018 to 3.6% in 2019 and our ARPU grew 5.1% without any service or modem rental-related HSD rate adjustment.

As mentioned previously, we are wrapping up our NewWave integration efforts. We have spent the past 2.5 years learning and applying the best practices of our combined companies, including upgrading plans, integrating systems and aligning programming and other agreements. In the coming months, we will begin mapping existing customers on legacy NewWave pricing and packaging over to Sparklight packages. We expect this change to continue to grow NewWave's ARPU contribution throughout 2020 and into 2021, while it is possible, we will also see a short-term increase in churn.

Additionally, we are planning to complete our Sparklight rebrand efforts in NewWave markets in 2020. A big thank you goes out to all of our associates evolved in these integration efforts. As integration work winds down in NewWave, we are excited to build on what we have learned and begin similar efforts in our Fidelity market.

On the topic of Fidelity, integration planning has begun in earnest, and we anticipate spending up to $40 million of incremental capital and realizing approximately $15 million of run rate cost synergies over the next 3 years. As we've mentioned previously, Fidelity's business model closely mirrors that of Cable One, so we anticipate a relatively seamless transition as we integrate and standardize our networks.

With that said, we will continue to work closely with our Fidelity associates to gain insight into their best practice and accelerate the assimilation of both companies.

Before I turn the call over to Steven, I'd like to take a moment to welcome Jim Obermeyer, our new Senior Vice President of Marketing & Sales. He joins us from Charter Communications, where he served as Vice President of Marketing since 2011. With more than 20 years of experience in brand and consumer marketing, sales management and market differentiation, I'm confident he will be a tremendous asset as we work to strengthen our competitive advantage.

And now Steven will provide more details on our fourth quarter results.

[Steven Cochran, executive]

Thanks, Julie. The fourth quarter of 2019 once again produced solid financial results. Revenues for the quarter were $318.8 million compared to $269.9 million in the prior year quarter, representing an 18.1% increase. As Julie mentioned, this increase was fueled by residential HSD revenue increase of 18.9% and a business service revenue increase of 41.6%. Excluding Clearwave and Fidelity operations, total revenue increased 3.5% year-over-year.

Net income in the fourth quarter was $53.6 million. Net income per share on a fully diluted basis was $9.32 per share. Operating expenses were $103.4 million or 32.5% of revenues in the fourth quarter compared to $91.8 million or 34% of revenues in the prior year quarter, a 150 basis point improvement.

Selling, general and administrative expenses were $64.7 million or 20.3% of revenues in the fourth quarter compared to $57.6 million or 21.4% of revenues in the prior year quarter, a 110 basis point improvement. Adjusted EBITDA was $158.3 million for the fourth quarter and increased 24% from $127.6 million in the prior year quarter. Our adjusted EBITDA margin increased 240 basis points year-over-year going from 47.3% to 49.7%. Keep in mind that this is inclusive of a full quarter of Fidelity operations.

Capital expenditures totaled $86 million for the fourth quarter of 2019, which includes $21.9 million related to Clearwave and Fidelity operations. Year-to-date, we spent $262.4 million on CapEx which equates to 46.1% as a percentage of adjusted EBITDA and 22.5% as a percentage of revenues. When excluding the incremental capital expenditures related to the NewWave and Clearwave integrations, our capital expenditures were 40.4% of adjusted EBITDA and 19.7% of revenues.

In the fourth quarter of 2019, we paid $12.9 million in dividends to shareholders. From a liquidity standpoint, we had approximately $125 million of cash on hand as of December 31, and we continue to generate significant free cash flow. At quarter end, our debt balance was approximately $1.8 billion consisting of term loan borrowings.

Overall, our debt to last quarter annualized adjusted EBITDA after netting cash on hand against debt was at 2.6x, providing us with ample liquidity. We also have $343.3 million available for borrowing under our revolving credit facility as of year-end.

As I mentioned on our last call, on October 1, we drew the full amount of our $450 million Delayed Draw Term Loan A and used the proceeds together with cash on hand to fund the Fidelity acquisition, which also closed on October 1. The purchase price was $531.4 million in cash after a customary post-closing adjustments.

A few other items I wanted to discuss before we take questions. First, I wanted to make note of the timing of our rate changes. Our annual video rate adjustment, which was implemented in February of last year, will not be implemented until March this year. Well, most of our contracted programming and retransmission expense increases took effect on January 1 in both years. We expect these timing differences will impact the comparability of the first quarter results, both sequentially and year-over-year. However, we do not believe it will have an effect on our full year adjusted EBITDA growth.

Second, as we think about future capital expenditures, we expect capital intensity associated with running the legacy business to decline. At the same time, we believe that our highest returns and, therefore, our most compelling use of capital comes from building fiber and expanding the network to drive additional growth. In 2019, we spent approximately $29 million related to network expansion, and we hope to grow that number in 2020.

Furthermore, we expect to deploy incremental integration capital for our recent acquisitions and we'll likely have to do so in connection with possible future M&A activity as well. Given that the expansion opportunities and integration capital are not consistent from quarter-to-quarter and year-to-year, going forward, we will not be providing a projection of our capital intensity.

Lastly, on the subject of M&A. We are actively exploring a variety of transactions that include both acquisitions and strategic investments. This includes looking at not only purchasing, but also partnering with companies in our space as it means to further deploy capital and expand the business. And we maintain the flexibility to use cash, debt or equity financing depending on the situation.

Sara, we're now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Philip Cusick with JPMorgan.

[Philip Cusick, analyst]

Steven, you stole a couple of my questions there at the end. The $65 plans and unlimited, you saw a nice pick up on those. Can you give us the mix of customers coming in on even higher plans? And what's the percent of the base taking unlimited today?

[Julia Laulis, executive]

Yes, Phil. It's Julie. The short answer is no, I can't. Over -- in terms of new sell-in, over 60% are taking higher plans period. So that means either $65, $80 or $125. But I don't have the breakout, and we don't show the breakout of each individual tier. And unlimited, what was your question on unlimited?

[Philip Cusick, analyst]

Just that what percent of the base is taking unlimited today?

[Julia Laulis, executive]

Well, the sell-in is over 20%. Right now, we have about half of our customers on the new plans, and we're working at migrating the existing customers, both on legacy CABO and NewWave totally onto the new packaging and pricing. So when that happens, we'll have a number.

[Philip Cusick, analyst]

Okay, understood. And why delay the video price increase? Is there something other than just a sort of regular way business? Is anything changing?

[Julia Laulis, executive]

No, it's just a matter of -- when we pass along our rate adjustment, we are doing in a way that is conscientious of our customers' pocketbooks to the extent possible, given what the programmers are passing along to us. And given retrans happened basically on December 31, we feel like we can't get good numbers together before then as well as the migrations, the rate migrations that we talked about, where we're taking existing customers that are not on our new packaging both in legacy CABO and in NewWave and moving them to the new pricing and packaging, which took priority over the video rate adjustment.

[Philip Cusick, analyst]

Understood. And lastly, going back to CapEx, you said that the capital intensity should come down in terms of -- it sounds like sort of regular way in handling network.

[Steven Cochran, executive]

So the legacy business.

[Philip Cusick, analyst]

Yes. And should we assume that that's in terms of dollars as well?

[Steven Cochran, executive]

Well, I mean, I think that one's harder to say, Phil, just because of the nature of we keep adding on to the business. So if you really want to talk about the legacy Cable One, then I think you could make the argument that as a dollar amount tied to that, but I think those numbers are getting harder to track, the more things we add into the total.

[Operator]

Our next question comes from Brandon Nispel with KeyBanc Capital Markets.

[Brandon Nispel, analyst]

A couple of questions. Julie, you mentioned the subscriber base in sort of legacy Cable One and NewWave accelerating year-over-year. Can you give us a sense if you expect that acceleration to continue in the next year? I think you did call out some potential churn. And then maybe just along those lines, there's obviously different footprints that you've added to the portfolio over the last couple of years. Can you talk to us a little bit about the differences in churn profiles? And how you might be able to drive churn of -- a higher churn market down to maybe a lower churn market?

[Julia Laulis, executive]

Sure, Brandon. I think that -- well, I think exactly what I said that the new pricing and packaging is helping to fuel growth. So to the extent that we move more and more of our base to that platform, you will continue to see that growth. That is my expectation. In terms of potential churn, that was related specifically to legacy NewWave transitioning to the new pricing and packaging. In many cases, NewWave has bundles that are being offered basically at cost, and that's not something that is sustainable. So those folks will see rate adjustments that might not be palpable. Our goal is to save the HSD customer on those, but we expect that there might be some churn. And looking at churn across the properties, I'm not going to get into specifics, but I will say that in legacy Cable One, our churn is incredibly low. NewWave, as it becomes more and more like Cable One, starts to mirror that. Fidelity may experience higher churn in the short run as their policies and procedures come in line with Cable One related to collections, for example. Does that help?

[Operator]

Our next question comes from Stephan Bisson with Wolfe Research.

[Stephan Bisson, analyst]

Just a couple for me. The later video price increase, can you talk a little bit about the size? I know historically, you try to push through the entirety of your programming cost increase? Is that still the idea?

[Steven Cochran, executive]

Yes.

[Julia Laulis, executive]

Exactly.

[Stephan Bisson, analyst]

Easy one. And then, have you thought about something like a Comcast Flex product for your HSD-only customers, either to increase the rate of acquisition or to just provide additional value that you might be able to charge for?

[Julia Laulis, executive]

We've thought about it, Stephan. I think right now, our focus is on growing the business, and maybe we can -- we have friends at Comcast, and we've talked to them as they launched it. And we're going to wait and see how that goes. I think we're hesitant to do anything that might get us in a place like exists on video, where we are not in control of our destiny.

[Stephan Bisson, analyst]

Understood. And then lastly, that was interesting commentary at the end regarding M&A and then also the strategic investments, any color on what those might look like? Is this kind of like connectivity via backhaul or additional fiber build? Any kind of help on? But it's kind of out there, I guess.

[Steven Cochran, executive]

I mean I think we're always looking to expand our network. It can be things like fiber to the tower. It can be finding an anchor tenant in a near net, that's not existing net. I think there's all kinds of ways to expand your footprint. Most of them, including putting fiber in the ground and from that, using that fiber to get more customers. And so I think any and all and with lots of markets through 21 states, we see lots of opportunities for that, candidly, not that dissimilar from what Clearwave's whole business model is and continuing to look for things like that. Is that -- was that specifically around the strategic investment piece?

[Stephan Bisson, analyst]

Yes. That's great.

[Operator]

Our next question comes from Clay Griffin with MoffettNathanson.

[Clay Griffin;MoffettNathanson;Analyst, analyst]

It's Clay on for Craig today. Look, we've seen WOW! and Google drop videos, is there a point at which you would consider dropping your video service and only offering a virtual alternative instead?

[Julia Laulis, executive]

It's not our intention to drop video at this time. It's been a nice mix for us as video declines and the revenues, not the cash flows, but the revenue is going down and us filling the bucket back up with high-speed data and business services. How we deliver that product might change in the future, but no plans right now to drop video outright.

[Operator]

Our next question comes from [ John Conroy with JK Media ].

[Unknown Analyst]

A couple of somewhat naive questions because I'm not all that close to your company. But when was the last explicit price increase on HSD and when might be next one...

[Julia Laulis, executive]

October of 2015.

[Unknown Analyst]

Say again, please?

[Julia Laulis, executive]

October of 2015.

[Unknown Analyst]

'15?

[Julia Laulis, executive]

Yes.

[Unknown Analyst]

And now you assume there's no plans for this year?

[Julia Laulis, executive]

Not at this time, no. We're getting some nice growth through unit growth and ARPU growth at this point in time, but that is always a possibility, if being warranted.

[Steven Cochran, executive]

Clearly, we invest significantly in capacity and allowing customers to use more and more and data usage continues to grow up. And so logically, at some point, you recoup that, but we've been able to grow without it to this point.

[Unknown Analyst]

Why shouldn't broadband unit growth be higher than 3%, 3.5%, given your penetration is 15 to 18 points below other cable companies? Is it simply because of your demographics?

[Julia Laulis, executive]

No. It's because of our strategy. We have a, I guess, what we think is -- simply saying, we count cash flows, not subs and we have a lifetime value orientation around our subscriber growth. So we don't go for every subscriber. And therefore, we don't believe it's a pure market share gain.

[Unknown Analyst]

Okay. One little aside, I was at the meeting in New York years ago, and Tom Might presented that slide presentation on why it's all about high-speed data and business services. Kudos to him, 5 or 6 years later, Wall Street has caught on and as far as cable companies are concerned, investors couldn't care less about video, because they look at your margins, which are 10 points higher or 13 points higher than other cable companies. So I don't know if Tom is resting in the sun, but you can tell him 1 investor says, kudos to you.

[Julia Laulis, executive]

I saw him last week, and we talk about it every time we meet.

[Operator]

Our next question comes from Frank Louthan with Raymond James.

[Unknown Analyst]

This is [ Rob ] on for Frank, actually. Are you guys interested in any of the CBRS spectrum?

[Steven Cochran, executive]

Yes, I think we'll obviously monitor what's going on there. I don't think at this point we would call ourselves a bidder, but definitely keep watching what's going on with all the various auctions and different kinds of government-type programs as well.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Laulis for any closing remarks.

[Julia Laulis, executive]

Thank you, Sara. I want to thank all of our associates for another great quarter and year. We appreciate everyone joining us for today's call, and we look forward to speaking to you again next quarter. Thanks, all.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.