Cable One - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day and welcome to the Cable One Fourth Quarter and Full Year twenty twenty Earnings Call. All participants will be in a 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 Cochrane.

Please go ahead.

Speaker 1

Thank you, Vishnabi. Good afternoon and welcome to Cable One's fourth quarter and full year twenty twenty 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 that involve risks and uncertainties. You can find factors that could cause Cable One's actual results to differ materially from these forward looking statements 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 UFS 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 Lawless. With that, let me turn the call over to Julie.

Speaker 2

Thank you, Stephen, and good afternoon, everyone. We appreciate you joining us for today's call. Each year as we look back and take stock of our accomplishments, we are grateful for our associates whose hard work and dedication continue to drive our success. But in 2020, an extraordinary year by any measure, the commitment that our associates made to keep our customers and communities connected to what matters most is exceptional. Whether quickly pivoting to find an innovative means to care for customers during the pandemic, working diligently to restore service during one of the most active hurricane seasons on record, while responding to the tremendous increase in customer demand, our associates rose to every occasion with grace and never lost sight of Cable One's values to do right by those we serve, drive progress and lend a hand.

I want to thank each and every Cable One associate for their strength, compassion, and resilience over the past year and as we continue to navigate through these challenging times. Encountered a new adversity with the recent severe winter storms that impacted our Texas market. Our team worked diligently to restore service to approximately 20,000 customers that were affected by commercial power outages and damage from snow and ice. Cable One also donated $15,000 along with food and supplies to local nonprofit agencies, including the Salvation Army to support relief efforts in our Texas market. I'm also incredibly proud of the results that this team delivered in 2020 and the relentless efforts they have demonstrated through the start of 2021.

I'll share with you some of the highlights from this past year and then turn it over to Steven who will provide a full recap of our financial performance and financing activities. Before getting into performance highlights, a quick word about our recently announced agreement to acquire the remaining equity interest of Hargray Communications. We are very excited for this transaction and we are looking forward to our Hargray colleagues joining Cable One. We'll get into more detail on this a bit later in the call. Looking back now, it has been almost one year that we, like everyone else, have been dealing with the impacts of the COVID nineteen pandemic.

Throughout this period, we have adjusted our processes and procedures to safeguard the health and well-being of our associates, our customers, and the communities we serve. We experienced record setting demand for high speed Internet and created new ways to safely install and service customers so they could stay connected to their loved ones, work, education, and entertainment. And we gave back to our communities with donations of time and money in support of those most impacted by the pandemic. Some of the highlights of our COVID nineteen response include developing video chat applications that offer technicians additional options to assist customers without having to enter a home, which not only helped us keep everyone safe, but also contributed to a meaningful reduction in time at each job. Providing free public Wi Fi hotspots across our footprint and launching a 15 meg service for $10 per month for the first three months to help low income families.

Partnering with ACA connects an education superhighway for the k through 12 bridge to broadband initiative, which helps school districts and states provide Internet access for students and low income households. Donating $300,000 to Meals on Wheels and local food banks in addition to the innumerable ways our associates supported their communities by providing care packages, supplies, time, and their talents, and donating more than $50,000 to k through 12 schools in our markets for back to school supplies. These efforts were in addition to our support of the FCC's keep Americans connected pledge as well as other relief measures that we've discussed on prior calls. On top of our COVID response, we also expanded our corporate social responsibility efforts in 2020 with donations to embrace race, a nonprofit organization that supports parents and raising children who are brave, informed, and thoughtful about race and to the equal justice initiative. For twenty twenty one, we will continue our partnership with embrace race, and we are also bolstering our social responsibility efforts with the launch of the Cable One charitable giving fund, which will provide grants to nonprofit organizations throughout our markets, concentrating on the areas of education and digital literacy, hunger relief, and community development.

We are also looking forward to expanding our Chromebooks for kids initiative this year by increasing the number of Chromebooks we donate to title one schools in our markets. To date, we have donated more than 1,500 Chromebooks under this program. Lastly, we are gratified to see that our associates recognize these efforts over the past year as evidenced by our recent recognition on the Forbes list of America's best midsize employers as well as in the results of our annual associate satisfaction survey. Our associates gave highest marks for, one, taking associate safety seriously, and two, the statement, I am proud to work for Cable One. Those responses coupled with a record high satisfaction rate illustrate that our associates are connected and engaged even in the virtual world we all find ourselves in.

With that as a backdrop, let me turn to our performance. We are pleased to have delivered another strong quarter and year with twenty twenty full year results producing a 13.5% increase in total revenues, an 18.5% increase in adjusted EBITDA and an adjusted EBITDA margin of 50.9%, which improved two twenty basis points year over year. We believe that our 2020 results reflect the continued success of our data centric strategy and disciplined approach to operations. Our proven track record of executing while integrating reinforces the strategic value of deploying cash to grow the business through broadband related acquisition and investment as well as capital projects that drive long term growth. In 2020, we spent more on CapEx for organic new build projects than any single year in the past decade, highlighting the fact that we are seeing meaningful growth opportunities in the rural communities that we serve.

In the 2020, although our reported residential HSD customer count shows a decline on a sequential quarterly basis. If you take into account the 19,000 customers contributed to Hargray as part of the exchange in October 2020, we would have shown a gain of more than 11,000 residential HSD customers. This figure would have been 2.5 times the organic customer growth we saw in the 2019. Our strong growth has continued so far in the 2021 as we have already added more residential HSD customers than we added in the entire 2019. Over the course of the year, we added a record 82,000 residential high speed Internet customers.

That figure excludes a net of roughly 14,000 residential data customers when we tally those we contributed to Hargray against the value net customers we acquired on July 1. To give some perspective on that growth number, if we exclude the customers added at the time of closing of each of our various acquisitions since 2015, we have organically added over 50% more customers in 2020 than we did over the total four and a half years between our spin off and the 2019. In addition, the businesses in which we have minority investments grew by approximately 13,000 residential and business data customers in the fourth quarter. While these customers are not reported in our results, these results highlight the value and shared commitment of our strategic partners. Overall, the flexibility of our pricing and packaging approach has enabled customers to easily identify the plan that best fits their evolving needs.

In the fourth quarter, even as the number of customers we connected increased by 30% year over year, over 70% of these new customers self selected into a package with a download speed greater than 100 megs. Our residential data ARPU thus grew 5.5% quarter over quarter to $75.65. From a technology standpoint, we continued our DOCSIS three dot one deployment and CMTS upgrades to further enhance network speed and reliability, so we can maintain capacity to stay ahead of the demand curve. During the fourth quarter, even as we saw average residential data usage grow by 37 year over year to nearly 500 gigabits per month, our network utilization at peak remained low with an average of 23% for downstream traffic and 19% for upstream traffic. On the business services front, revenue grew by 3.4% quarter over quarter and by 14.7% year over year.

As I noted on our last earnings call, we've continued to work with our small business and enterprise customers on providing product and service solutions to support them during this critical time. After the start of the New Year, we launched Internet backup service for small to medium sized businesses and optical wavelength service for fiber customers. Internet backup service provides a wireless solution that keeps customers' Internet operating in event of a service disruption, such as a storm related power outage. Wavelength service offers a secure delivery method for businesses that must move large amounts of sensitive data quickly, securely, and reliably reliably by leveraging our fiber backbone to deliver a dedicated point to point high capacity data network service to larger businesses and carrier customers. We anticipate products such as Internet backup and wavelength service will create opportunities to attract new customers as well as upgrade existing ones.

Over the course of 2020, we also pressed forward with our integration efforts. We completed the rebranding of our NewWave properties to Sparklight, which included migrating customers to current Sparklight packages. And our Fidelity integration continues on a successful trajectory. Last year, we invested nearly $14,000,000 in plant upgrades that enhance network reliability and support of high speed Internet growth. Additionally, our associates are working closely to learn from each other and leverage best practices.

For example, our technician video chat functionality was an innovation originally designed by our Fidelity associates, which was rapidly implemented across the entire company. While there are more integration opportunities horizon, I'm pleased to announce that Fidelity has already exceeded our original run rate cost synergy estimate. Congratulations and thanks to this group for all their hard work. On the acquisition and investment front, it has been a busy time at Cable One. In addition to closing our acquisition of ValuNet in the 2020, we have completed five strategic investments over the past thirteen months with a cumulative book value of nearly $750,000,000 This includes our partnership with mega broadband investments that closed during the fourth quarter.

Each of our investments and acquisitions have furthered our vision to deliver the very broadband service to small cities and large towns throughout rural America. Last week, we announced that we have entered into an agreement to acquire the remaining equity interest of Hargray. As you may recall, we currently own about 15% of the company on a fully diluted basis from the contribution of our Aniston system. This is a truly exciting opportunity for us as we are confident that Hargray represents an excellent strategic and cultural fit. Pargray has a rich history of being a leader in residential HSD and business services across the markets that serves in Alabama, Florida, Georgia and South Carolina.

Our two companies are similarly committed to the success and well-being of our associates, customers, and communities. I look forward to officially welcoming our future Hargrave colleagues to the Cable One family later this year. And in the meantime, I'd like to thank all of those who have worked diligently thus far to help create this exciting opportunity. Steven will provide more detail on Hargray and the transaction in his remarks. As we look to 2021, I'm excited about the opportunities the year will bring, and I am confident that our pledge to care for our customers, serve our communities, and pursue operational excellence will keep us on track for long term sustainable growth.

And now, Stephen.

Speaker 1

Thank you, Julie. Before I begin, I'd like to remind everyone that because of the contribution of our Anniston, Alabama systems to Hard Grade on October 1, Anniston operations are not included in our fourth quarter twenty twenty results. For context, these operations represented approximately 19,000 residential HSD customers and produced third quarter twenty twenty revenues of $9,400,000 The 2020 generated solid financial results. Revenue for the fourth quarters were $337,000,000 compared to $319,000,000 in the prior year quarter, a 5.7% increase. This increase was fueled by residential HSV revenue increase of 17.1% and a business services revenue increase of 3.4%.

Our fourth quarter results include $1,200,000 of credits for customers who experienced brief outages during our most active hurricane season recent history. To give a sense of our year over year organic growth, when we exclude fourth quarter twenty nineteen Anniston results and fourth quarter twenty twenty ValuNet results, we would have seen a fourth quarter total revenue increase by 8%, residential HSD revenue increased by 19.3% and business services revenue increased by 5.1%. Residential HSD customers grew by more than 82,000 or 11.8% year over year, which is net of approximately $14,000 from the Aniston systems that were contributed to Hargray and acquired from ValuNet. Operating expenses were $99,400,000 or 29.5% of revenues in the fourth quarter compared to $103,400,000 or 32.5% of revenues in the prior year quarter, a 300 basis point improvement. Selling, general and administrative expenses were $64,700,000 for both the 2020 and 2019.

These expenses were 19.2% of revenues in the 2020 compared to 20.3% of revenues in the prior year quarter, a 110 basis point improvement. Net income for the fourth quarter was $106,200,000 which included an $82,600,000 pretax noncash gain from the Anniston contribution. Net income also included a $17,500,000 noncash loss from a value a fair value adjustment associated with the MBI call and put options. As part of our investment in MBI, we acquired a call option to purchase the remaining 55% of equity interest that we don't already own between the 2023 and the 2024. Meanwhile, if we elect not to exercise our call option, certain investors in MBI have a put option to sell us all those remaining equity interest in the 2025.

These options are subject to mark to market accounting on a quarterly basis. Until these options are exercised or expire, any changes in the assumptions used to determine their fair values could increase or decrease the resulting valuation, which in turn could cause significant non operating fluctuations in our GAAP financial results from one quarter to another. Net income per share on a fully diluted basis was $17.54 per share, inclusive of the noncash gain and the noncash loss I just mentioned. Adjusted EBITDA was $178,900,000 for the fourth quarter and increased 13% from the prior year quarter. Our adjusted EBITDA margin increased three forty basis points year over year, going from 49.7% to 53.1%.

Capital expenditures totaled $75,200,000 for the 2020, which equates to 42.1 percent of adjusted EBITDA. During the quarter, we invested $13,800,000 of CapEx for network expansion and 4,100,000.0 bringing our total for the year to $36,700,000 and $13,700,000 respectively. In the 2020, we paid $15,100,000 in dividends to shareholders. At the October, we amended our credit agreement to upsize certain of our term loans by $300,000,000 and our revolving credit facility capacity by $150,000,000 And we extended maturities of our term loans through 2025 to 2027 as well as our revolver credit revolving credit facility to 2025. We used the net proceeds from the term loan upsizing and cash on hand to repay the $483,800,000 outstanding principal under our Term Loan B1.

We also completed a private offering of $650,000,000 of four percent ten year senior notes in early November. And we used a portion of the net proceeds to acquire a 45% equity interest in MBI for $574,900,000 in cash. From a liquidity standpoint, we had approximately $575,000,000 of cash and cash equivalents on hand as of December 31, and we continue to generate significant free cash flow. At quarter end, our debt balance was approximately $2,200,000,000 consisting of approximately $1,500,000,000 in term loans and $650,000,000 in unsecured notes and finance lease liabilities. We also had $470,400,000 available for additional borrowings under our revolver at December 31.

Overall, our debt to last quarter annualized adjusted EBITDA after netting cash on hand against debt was 2.3 times. As Julie already mentioned, last week, we announced that we'll be purchasing the remaining equity interest in Hargray that we don't already own. That represents approximately 85 percent of Hargray on a fully diluted basis. The transaction implies a $2,200,000,000 total enterprise value for 100% of Hargray on a debt free and cash free basis. Hargray is a regional communications provider serving approximately 125,000 customers in South Carolina, Georgia, Northern Florida and Alabama, with last quarter annualized revenue and adjusted EBITDA as of 12/31/2020 of $295,000,000 and $128,000,000 respectively.

The transaction is expected to close during the second quarter of this year. There's additional information on Hargray in the investor presentation filed with our press release earlier today. We have received $900,000,000 of bridge loan commitments to finance a portion of the purchase price. Last week, Hargray amended its credit agreement to provide us with the option to assume approximately $689,000,000 of Hardgray's outstanding debt upon the closing of the acquisition, which reduced the cash purchase price we must pay at closing on a dollar for dollar basis. The combination of our cash resources, revolving credit facility capacity, bridge loan commitment and Hardgray's portable credit facility provides us with plenty of ways to finance this transaction.

But we intend to keep our options open and we'll look to opportunistically strengthen our balance sheet and replace the bridge loan commitments with other capital depending upon the availability of the markets. Ms. Navi, we're now ready for questions.

Speaker 0

We will now begin the question and answer session. Star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. The first question comes from Phil Cusick with JPMorgan.

Please go ahead. Phil, are you in there? Is your line muted? Okay. Looks like his line is muted or he's not able to hear.

I'm going to move on to the next question. It's from Greg Williams with Cowen. Please go ahead.

Speaker 3

Great. Thanks for taking my questions. Steve, I'll pick up right where you left off on financing the Hargray deal. In the past, you typically said you would be comfortable going up to that three and a half times leverage. Is that sort of range still an area where you'd be comfortable going, or would you consider even going higher considering the credit markets?

And second question, I just was looking at slide seven, which is super helpful on the hardware acquisition and the 45,000,000 in run rate synergies. Can you unpack some of those synergies? How much of it is the tax NPV versus OpEx and CapEx? Thanks.

Speaker 1

Sure. So on the first question on the financing, think, we definitely we've always said that we're comfortable living in the 3.5 times range, comfortable going higher if we felt we could delever quickly. Clearly, I think we have the ability to delever quickly on this, both from our own growth and the growth of the businesses we've been acquiring. That being said, probably more importantly, what we have also said as part of our strategy is to have a strong balance sheet, and we're going to opportunistically look for chances to create and have a strong balance sheet because that's been a huge part of our ability to transact over the last several years. And so with that in mind, we'll look for those opportunities.

I think first and foremost, we are focused on getting certainty, and we were able to accomplish that both because of moves we had made in the past to create the cash and revolver capacity we had to get the bridge financing that we put in place, but also that it didn't move and get the hard grade debt lined up. So we feel great about certainty to be able to close the transaction and be comfortable with that as a starting point. And now we'll look to be opportunistic and improve the balance sheet where we get the chance. From the synergy standpoint, there's not a lot of tax benefit. There's a little bit of tax benefit.

The majority of it really is both expense and revenue synergies that look very similar to types of synergies we realized historically, whether you go to NewWave or Fidelity. This is a similar type transaction. Part of it is putting in the Cable One playbook and taking advantage of what Hargray does well, apply that across our company and then go and look at things that have worked really well for Cable One and apply our business model to that. And that's why we put three years out there. We don't ever want the synergies to drive the decisions.

We want to make sure that the right business moves are the reason we make the decisions we do, but we feel very comfortable that we'll realize that kind of synergy over a three year time period.

Speaker 4

Got it. Thank you.

Speaker 0

The next question comes from Craig Moffett with MoffettNathanson. Please go ahead.

Speaker 5

Hi. Thank you. Steve and Julie, two questions if I could. First, you're obviously, always looking at acquisitions, I guess. The the headline price and even the post synergy price for Hargray is a a an awfully high price relative to public cable multiples.

I'm wondering if you could just talk about, what you're seeing from potential acquisition candidates in terms of their expectations, and does that make it harder to to get deals done significant of size? And then, second, I guess, the the issue that that all your larger peers are struggling with is how to think about broadband growth for 2021 in the absence of of the the work at home and pledged dynamics and that sort of thing of 2020. Can you just talk about how you think growth what what are the puts and takes to growth this year and how you think that 2021 will compare to say 2019?

Speaker 1

Sure. So on the deal multiple side of it, I mean, clearly, we have seen multiples move up and we've also seen our own multiple move up. And we think justifiably so, we think businesses that are HSD focused, that are HSD led, that have a competitive environment like we do, that have growth profiles like we do, we think that drives a multiple that looks much more infrastructure like. And that's what we've seen on both things we looked at and not either participated in or looked at and not transacted Fortunately, we've been able to find a number of transactions where there were other things other than just price that mattered. They really cared about where their people landed, who was going to be serving their communities, those kinds of things that allowed us and we were still able to be fair in transacting, but also getting deals done that were outside of processes.

And so I think we feel very comfortable that the multiples we're paying are for assets that look similar to what we are that we're going to be able to apply our business model to and should have the same trading characteristics that we've had because of the dynamic of the business model that we're operating in maybe compared to some of the larger peers. On the customer growth side, I'll let Julie take that.

Speaker 2

Sure. Thanks, Stephen. We are proud to have built, infrastructure that is focused on customers, particularly serving those customers that are the least served, until we showed up in those markets. And I think that we had the belief that there was going to be a tipping point where what we had built would be needed by our customers. We had thought that likely it would be applications and services that would be riding on our networks.

We had no idea that it would be a pandemic. And and but it came and our and our network was there for our customers. And we grew as our peers grew, and that growth continues. As you know, Craig, we have room on the penetration side to grow. And now that there is a true need for the type of network that we provide for the type of reliability and service that we provide, it continues to grow and we feel confident that we have, the dual levers of unit growth, penetration growth as well as ARPU growth as customers elect to take, higher speed, higher data packages.

If the pandemic has taught us anything, it's that we can't predict or control things the way we would like. But for right now, we're feeling really good about the business that we're in.

Speaker 1

Thank you.

Speaker 0

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

Speaker 4

Okay, great. Thanks for taking the questions. Maybe these are both for Steven. But Steven, EBITDA margins are clearly pretty strong for this business, over 50% for the year. When you look at sort of the acquired cable systems versus legacy Cable One footprint, could you sort of frame for us the spread between the more mature systems and the newer assets for you in terms of EBITDA margins?

Then, Julie, you're obviously, you made some comments on the organic HSD sub growth during the first quarter. What type of level of growth do you expect in 2021? And maybe what would be helpful is if you could frame for us what level of organic HSD net adds you had in 2020 and 2019, just for frame of reference? So

Speaker 1

Brandon, on the first question on the EBITDA margins. So I think a couple of things on that. First, I would say there's obviously a lot of conversation around what's a pull forward and what's not a pull forward. What I would say we've seen because we've continued to see accelerated growth, as Julie mentioned, both in the fourth quarter and as so far as the first quarter. So maybe as in a pull forward, what there is, is an acceleration of our business model.

We've always talked about what was going to happen when the business kept going and we added more data customers and had less video customers. And because of our approach on video, we've seen accelerated video losses and vastly accelerated HSD gains. And because of that, our margins just moved more quickly to where we thought they would move to and they're going to continue to move to. As it relates to the actual acquisitions themselves, we don't truly go down to EBITDA for them. But if you look at kind of the system cash flow type that we would evaluate on a market by market basis, They're all getting really close.

Clearly, the legacy CABO stuff, just because of where it was in the plan is further along. NewWave has closed the gap significantly. And Fidelity is actually unbelievably close, partly because of what we talked about with the synergy realization piece that we've had on that, that they're actually running very hot on that as well. And that's part of the that's clearly part of the M and A strategy. I mean, part of what we try to do is make sure that we have opportunities to deploy our capital in the most effective ways.

We think that's through either network expansion or M and A. And then when we buy things, we execute and put our business model on it we generate more free cash flow. And then the goal is to go and find other things to invest that in because we think that's the beauty of our model. It's great that you can have a business that generates a lot of free cash flow. But if you can actually redeploy that into business that's similar, we think that's kind of what is the secret sauce that has worked so well at Cable One to this point.

Speaker 2

Yes. And I think, Brandon, that Steven just answered your second question to really the best of our ability. I mean, again, we can't predict and we can't control, but we can tell you that, you know, we had growth we have continued accelerated growth in the fourth quarter, and it's it's still going strong now. We've got room to grow, and we're doing it.

Speaker 4

Thanks for taking the questions.

Speaker 0

The next question comes from Frank Louthan with Raymond James. This

Speaker 6

is Rob on for Frank. So can you talk about the outlook for you guys under potential Title II net neutrality scenario? And how much do you think you'd have to raise pricing if data caps weren't allowed, hypothetically?

Speaker 2

Thanks, Rob. It's Julie. I'll start, Steven. Feel free to jump in. First, you know, we're we're strong believers in in net neutrality.

We don't throttle. We don't have fast lanes. We believe in an open Internet. We don't believe that it needs to be legislated, however. When you talk about possible regulation and and raising prices, a couple thoughts come to mind.

One is that the actual amount of ARPU that comes from usage based billing has gotten relatively small under our new pricing and packaging scenarios. So what's driving our ARPU growth on the residential HSD side. Well, over 70% of people elect to go into a package that's higher than 100 megs. And those carry higher prices, right? They also elect to take unlimited data packages, drives ARPU.

We also, which, you know, I just think is really smart. We don't discount any package other than that 100 meg package. So when people elect, and it's by far and away the majority, but it's higher priced packages, they're they're buying them at full price. We are not deeply discounting. So those are the things that are driving ARPU for us.

Our 100 meg service is an well, all of our services. But if you really look at our 100 meg service, it is a tremendous value at $55. And by the way, it has been $55 since the 2015. We have not raised the prices on our residential HSD services. It is the sell in and the lack of discounting and a little bit of UVB that allow the value price to be available to the majority of the customers.

And those that want more or use more, they pay more. We think that's a really beautiful value proposition for customers.

Speaker 5

Great. Thank you.

Speaker 0

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

Speaker 2

Thank you, Vishnavi. I want to thank our associates for all they have done and continue to do during incredibly uncertain and challenging time. This team continues to be the driving force behind our success and I feel especially privileged to work alongside of them each and every day. We appreciate everyone joining us for today's call and look forward to speaking with you again next quarter. Thanks all.

Speaker 0

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