Cable One - Earnings Call - Q3 2019

Transcript

Speaker 0

Good day, and welcome to the Cable One Earnings Report Q3 twenty nineteen Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stephen Cochran.

Please go ahead.

Speaker 1

Thank you, Sarah. Good afternoon, and welcome to Cable One's third quarter twenty nineteen earnings call. We're glad to have you join us as we review our results. Before we proceed, I would like to remind you that today's discussion may contain forward looking statements related 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 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 Volleys. With that, let me turn the call over to Julie.

Speaker 2

Thank you, Stephen. Good afternoon, and thank you for joining us for our third quarter twenty nineteen earnings call. Before getting into our results, I want to welcome our more than 400 new associates who join us from Fidelity. I will talk more about the acquisition a little later, but we are extremely excited to have them as part of the Cable One team. I'd also like to take a moment to welcome Chris Miller, the newest member of our Board of Directors.

Chris is a valuable addition who will provide unique insight and experience to our already exceptional Board. I'll begin by reviewing some highlights from the quarter and then talk about a couple of important events that happened shortly after quarter end before handing the call over to Stephen for a full recap of our financial performance. We are pleased to have once again delivered a quarter of strong performance, including year over year increases in total revenues of 6.2% and adjusted EBITDA of 14.1%. Our adjusted EBITDA margins increased three forty basis points year over year to 49.1% for the quarter. These results illustrate that our business strategy continues to consistently deliver both top line and adjusted EBITDA growth as well as expanding margins.

Speaking of growth, we experienced a 3.5% residential HSD unit increase and a residential HSD ARPU was up 4.7% year over year resulting in an 8.2 increase in residential HSD revenues. Revenues from business services were up 28% year over year or 10.3% excluding the impact of Clearwave. As you might recall, last year, we accelerated marketing spend in the third quarter in advance of our NewWave billing system conversion. So we expected to have a tough comparison from a net add standpoint. Given that challenge, we are especially pleased with our performance relative to last year.

Meanwhile, our business services group launched an enterprise Wi Fi service, which offers an agile Wi Fi solution with a cloud based customer portal and user app, enabling enterprise businesses to configure, manage and monitor their WiFi network and user activity from anywhere at any time. On the SMB side, we launched HFC gigabit service that provides greater connectivity and faster speeds to meet the growing needs of those sized businesses. Our business team is also proceeding with the CRM update that I talked about earlier in the year, which we expect will help us improve efficiencies, including a reduction of approximately 30,000 manual touch points annually. As I mentioned during our last call, we are nearing the end of our NewWave integration efforts. Our team has done a remarkable job during integration, and we recently completed two more important initiatives.

First, activating usage based billing after several months of monitoring, educating and testing. This will grow NewWave's HSD ARPU contribution as we move into the fourth quarter. Second, the team revamped NewWave's video programming lineup to match legacy Cable One following the September 30 expiration of NewWave's contract with Viacom. The team executed the channel changes and handled customer communications and the related call volume in a very effective and customer friendly manner. Our rebrand of Sparklight is also progressing well as we approach completion of our legacy Cable One markets.

We've seen positive consumer sentiment based on our most recent research as 73% of those consumers in those markets say they understand that Cable One is the same company as Sparklight. When surveyed, these consumers noted they feel positively about the new Sparklight brand and perceive the brand as one that provides the latest Internet technology. We appreciate the hard work and commitment of all of our associates over the past year and making our rebrand a success. And we look forward to completing the rebrand of NewWave Markets in 2020. We invested a great deal of time and effort in Q3 planning to close the Fidelity acquisition.

We appreciate Fidelity's ownership group who worked diligently with us over the past several months, which allowed us to be well prepared to bring Fidelity into the fold. In addition to numerous visits to various markets over the last six months, our leadership team was able to spread out and visit each Fidelity market on October 1, the day we closed the transaction. With this cooperation, we were able to accomplish some day one achievements, such as moving all Fidelity associates onto our HRIS system immediately. This type of execution is encouraging and we believe we are off to a great start. And now Stephen will provide more details on our third quarter results.

Speaker 1

Thanks, Julie. The 2019 once again produced strong financial results. Revenues for the third quarter were $285,000,000 compared to $268,300,000 in the prior year quarter, representing a 6.2% increase. As Julie mentioned, the increase was fueled by a residential HSD revenue increase of 8.2 and a business services revenue increase of 28%. Excluding Clearwave operations, total revenues increased 3.6% year over year.

Net income in the third quarter was $49,800,000 Net income per share on a fully diluted basis was $8.68 per share. Operating expenses were $94,900,000 or 33.3% of revenues in the third quarter compared to $92,000,000 or 34.3% of revenues in the prior year quarter, a 100 basis point improvement. Selling, general and administrative expenses were $58,900,000 or 20.7% of revenues in the third quarter compared to $59,400,000 or 22.2% of revenues in the prior year quarter, a 150 basis point improvement. Adjusted EBITDA was $140,000,000 for the third quarter and increased 14.1% from $122,700,000 in the prior year quarter. Our adjusted EBITDA margin increased three forty basis points year over year, going from 45.7% to 49.1%.

Capital expenditures totaled $65,800,000 and $68,300,000 for the 2019 and 2018, respectively. Included in the current quarter were $6,000,000 of capital expenditures related to Clearwave operations. Year to date, expenditures as a percentage of adjusted EBITDA and revenues were 42.920.8%, respectively, in line with our expectations. In the 2019, we paid $12,800,000 in dividends to shareholders. From a liquidity standpoint, we had approximately $146,000,000 of cash on hand as of September 30, and we continue to generate significant free cash flow.

At quarter end, our debt balance was approximately $1,300,000,000 consisting of term loan borrowings. Overall, our debt to last quarter annualized adjusted EBITDA after netting cash on hand against debt was at 2.1 times, providing us with ample liquidity. We also had $343,300,000 available for borrowing under our revolving credit facility as of quarter end. On October 1, we drew the full amount of the $450,000,000 delayed draw Term Loan A established in the second quarter and used the proceeds together with the cash on hand to fund the Fidelity acquisition, which also closed on October 1. The purchase price was $525,900,000 in cash, subject to customary adjustments.

We anticipate spending up to $40,000,000 in incremental capital over the next three years in order to integrate and standardize the network as previously disclosed. We expect to realize approximately $15,000,000 in estimated run rate cost synergies within the next three years. Earlier today, we filed an investor presentation with the SEC, which is also posted on our IR site, and gave some of the key financial and operating statistics for the acquired Fidelity operations. Similar to Clearwave, we do not expect to separately report on Fidelity results going forward. After giving effect to the transaction and including Fidelity's twenty nineteen year to date annualized adjusted EBITDA of approximately 47,000,000 the net debt to adjusted EBITDA leverage ratio at the end of the third quarter would have been 2.8x with a total debt balance of approximately $1,800,000,000 and a cash balance of approximately $66,000,000 We are pleased with another strong quarter and excited about the opportunities that Fidelity provides as we work to integrate their operations into our own.

Sarah, we're now ready for questions.

Speaker 0

We will now begin the question and answer session. Our first question comes from Philip Cusick with JPMorgan. Please go ahead.

Speaker 3

Hey guys, thanks. I guess to start, let's talk about the rebranding cost. There seems to be a lot of questions on that. The 3,000,000 pulled out, was that incremental to your typical run rate of marketing? Thanks.

Speaker 2

Yes. It was, Phil. We originally said that we would spend, between 9 and 11,000,000 on the rebrand for Legacy Cable One and NewWave, and we've spent about 60% of that so far right on schedule.

Speaker 3

And you said you'll finish that spending in early two thousand twenty?

Speaker 2

In 02/2020.

Speaker 3

Okay. And then in terms of the spending, I'm surprised that given that you were spending a lot of money in marketing a year ago and that drove the 3Q sub numbers in '18, that the rebranding spend didn't have any impact on on 3Q subs this quarter. How should we think about that?

Speaker 2

Well, the rebranding is is about brand, not acquisition. So it is spending money on things, you know, everywhere from office redesigns to uniforms to on air, getting people to understand that Cable One is now Sparklight and what does Sparklight mean. And that's across all of our lines of business from, broadband to business services, where it really, I think, makes a big impact in advertising sales as well.

Speaker 1

Phil, I thought your question was going to be, boy, you spent a lot less in marketing this year and you added the same number of customers. That's really impressive. So for me, that's not really a question.

Speaker 3

Yeah. That that was definitely my question.

Speaker 1

Okay.

Speaker 3

Well, okay. Last one on this topic, and then I'll let you go. But but the we pull that out, the margin growth sequentially was really strong. So is this a good run rate sort of jumping off period going forward? Or is there anything else going on that would make this abnormal?

Thank you.

Speaker 1

No. I think what we would say is we continue to see margins expand as we continue to execute on the business strategy, and we expect that to continue. There's always one offs in any given quarter and timing of things. So for instance, in the first quarter when programming rate increases happen before you do your rate adjustments for customers, those things impact margins. So there's always timing.

But as we think about the long term, which is the way we look at it, we see margins continuing to increase over time. And this is reflective of that.

Speaker 2

For acquisitions.

Speaker 1

Yes, for acquisitions, which will bring something in that when infidelity has lower margins and that will impact, as we continue to migrate them towards our business model.

Speaker 3

Okay. Thanks very much guys.

Speaker 0

The next question comes from Zack Silver with B. Riley FBR. Please go ahead.

Speaker 4

Okay, great. Thanks for taking the question. On the NewWave usage based billing front, so rolling that out this quarter, I guess how should we think about, the ARPU trajectory based on the the rollout of that? I mean, is there gonna be sort of a sharp acceleration there? Or is it gonna be more muted and and more like the trend that we've seen?

Speaker 2

Zach, it's Julie. I think what we'll see, and it did just roll out at the very last week of the quarter, so we're gonna we're gonna start seeing the results throughout the fourth quarter, is exactly what we've said. We're gonna continue to move NewWave to look like Cable One. So you would expect to see their ARPUs, which have been steadily getting closer to ours, become more so.

Speaker 4

Okay. And then more high level one, just, you know, as we continue to get sort of fixed in wireless industry convergence, wondering if we can get your updated thoughts around how you sort of view the opportunity to bundle wireless into your offering through an MVNO relationship like you know, Charter and Comcast and Altice are doing?

Speaker 2

Well, my first thought is I'm not sure if we wanna comment about it at all. I I don't think that the MVNO model right now is something that we find a large interest in given the margins and the amount of work and growth and opportunities that we have with our existing business right now. But we are always leaning into and learning from others, and I guess we'll see.

Speaker 4

That makes sense. And then last one for me. Just on the unlimited plan penetration, any update you can give on that? You know, how is that trending, accelerating, decelerating? A hard number would be great.

Speaker 2

Yeah. Well, so I'll I'll the number I'll give you is still over 10%. It is slightly accelerating. I think the interesting thing that I took note of is that the higher speed that a consumer takes, the higher the percentage of unlimited sell in. So that is to say, if you take our gig service, the percentage of customers that take unlimited there is the highest of any consumer group.

Just just an interesting factoid.

Speaker 4

That is interesting. Okay. Thanks, Julie.

Speaker 5

You're welcome.

Speaker 0

Our next question comes from Steven Bison with Wolfe Research. Please go ahead.

Speaker 6

Good evening. So with Fidelity closed, this is, I think, the first time in a while you haven't had something pending. Can you update us on your use of cash and how many more fidelities you might see out there if you were to find attractive acquisitions?

Speaker 1

Sure. I think we would say that we're always out looking, trying to find what's next. Definitely didn't spend a lot of time this summer necessarily looking at that because we were 100% focused on the integration process. I'd say we're farther along on this one than we would have been on, say, where NewWave was, one because of the size of NewWave relative to Cable One at the time, and then the size of Fidelity relative to what Cable One is today. And so the fact that we got kind of a jump start on this one combined with that allows us to probably be in position to move more quickly than we did last time.

But so we will be looking, but I would say we've really just started that process again.

Speaker 6

Okay. And if something doesn't jump off the screen at you right away, any update on capital return policy, dividend share repurchases?

Speaker 1

Yes. I think our capital policy is pretty set, which is we're opportunistic when it comes to share repurchases. And we plan to have a very predictive dividend. And so I think would tell you that we value the flexibility of our balance sheet and the opportunity knowing the amount of opportunities that are out there, we value the flexibility of our balance sheet more than just trying to maximize the perfect level of leverage at this point.

Speaker 6

Understood. And then I guess lastly, the system conversion costs, can you remind us how much longer those should be in there and a potential dollar amount?

Speaker 1

Yes. I think what the run rate you see is probably going to be consistent through the middle of next year.

Speaker 6

Great. Thanks And it's related

Speaker 5

yes, go ahead.

Speaker 0

The next question comes from Craig E. Moffett with 2000 and '4. Please go ahead.

Speaker 5

Yes. Hi. I I I just stay with this question of of of acquisitions for a second, Steve. How do you think about your capacity to do acquisitions now that, having had some success with a string of them? What kind of size and frequency do you think you can bite off?

Assuming you can find the targets who are willing to take the currency, how just operationally, at what kind of pace do you think you'd be able to maintain?

Speaker 1

Well, think one, the question you asked as part of yours is the most relevant part is what becomes available and when. I think we will have an increasing capacity to be able to do more just because we get bigger and the deal sizes become less of the total company and we get better at it all the time because of what we're learning. So I think from that standpoint, our pace should be able to increase assuming there's opportunities that present themselves. A lot of these things are not in our control based on where private equities or families or other things decide to do. But that doesn't mean we won't be pounding the pavement to try and find the next right thing for Cable One.

And so yes, we feel like it's an important part of what we do. Our base business is our base business and we're operators at the core. And I think we're very successful in the execution side of that. And so they thought of being able to go and bring more into that and continue to execute what we really like. So we definitely look at this as incremental, not the business plan.

The business plan is what we execute on every day.

Speaker 5

And is there a sense that you could do something larger at this point? You know, having done relatively small ones at this point, you know, is there there a sense that you've now sort of proven the model to be able to do a deal that with with larger size acquisitions?

Speaker 1

I think it's probably more about looking at each and every deal and figuring out how it fits into our company. Part of the beauty of what we've done is they've been a nice sized fit to where we can take it, we can apply what we do and it doesn't get in, it doesn't interrupt running the business day to day. And so could we? We definitely have the debt capacity. We have those kinds of things, but I think it will always be an organizational conversation to figure out where does this fit and how does it fit into our ten year plan, not what's it going to do for the next quarter.

Speaker 5

All right. Thanks. That's helpful, Steve. Sure.

Speaker 0

Our next question comes from Frank Louthan with Raymond James. Please go ahead.

Speaker 7

Great. Thank you. Just wanted to touch base on some of your lower priced broadband products. What's the current take rate with those? And how are you feeling about marketing those?

And then just curious on various platforms you got native on your set top boxes. Are are you promoting or pushing any streaming services, like Netflix or whatever you have on there? Are you considering adding any others? Thanks.

Speaker 2

Hey, Frank. It's Julie. Our lowest priced broadband service, has very low levels of take rate, very low levels. We do market it, but what we find is when people call in, the, the price of the next level package up for the value and what you get seems to draw people into that next level to the starter package, is the 100 package. So the take rate, even though we market it, tends to be very low.

In terms of marketing platforms on our set top boxes, we don't really spend any money marketing video. But having said that, we have worked with training our people to be sort of like a concierge service. So if a customer calls in and, they are maybe frustrated with the cost of the video service or if they're looking for a particular thing, we will talk to them about what they like to watch, and we will suggest OTT platforms for them. In fact, if you go into our office in Sioux City, for example, you might see several of them advertised in in the lobby, and that is so that a conversation can be had with our associates, helping direct them to the video service that works best for them, and it doesn't have to be ours.

Speaker 0

The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Okay. Great. Thanks for taking the questions. Julie, question for you. What are the steps that you need to take to make Fidelity look like legacy Cable One, and how long do you think that will take?

And then maybe if if you could talk about the customer growth rates, from Fidelity, that would be great. Then one for Steven. You mentioned synergies from new wave programming. I was wondering if you could talk more about that, maybe a dollar amount. And then Fidelity synergies, what are immediate and what do you have to wait for?

Speaker 2

Thanks, Brandon. For Fidelity, if if you take a look at the deck that was posted, we're we're talking about an integration time period of approximately three years. And, you know, Fidelity is a fantastic acquisition for us. We will do the very similar things that we did with NewWave. We will be working on integrating their network with ours.

We'll be spending time with them to learn, best practices from them and and and coming up with a new cabo way of doing things. We will work on having their revenues and ARPUs match ours, their margins match ours, their costs match hours, and all those will take about three years. In terms of their customer growth rates, I don't think that's a place I'm going to go right now. Thanks.

Speaker 1

Yes. So and your questions to me, Brandon, on the synergies. We're not going to give specifics on the programming realignment savings that came from that other than to say that it fell within what we had originally guided towards the total amount of synergies and that we feel very comfortable that as this is kind of the last piece of that, that we more than realized what we said we were going to. And as it relates to the Fidelity timing, it's one of those that's really kind of spread over the three years. There's a handful that come just from combination of some of the most senior executives moving on and savings that come from that and their own programming realignment that took place right after close.

And so there's a decent amount that happened and things that we'll be able to roll onto contracts of ours, whether it's from a bandwidth standpoint or insurance or all of those kinds of system related. And then over time, the rest of it as it starts as we start to make changes, basically taking the best practices of whatever we do and what they do and move the company forward from there. So I would say they'll come in reasonably even over the three years with a decent kick start right off the bat with some of the initial savings that happened right at the October.

Speaker 0

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

Speaker 2

Thank you, Sarah. I want to thank all of our associates for another great quarter. We appreciate everyone joining us for today's call and look forward to speaking with you again in 2020. Thank you.

Speaker 0

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