Cable One, Inc. (NYSE:CABO) Q3 2023 Earnings Call Transcript

Cable One, Inc. (NYSE:CABO) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One Third Quarter 2023 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Jordan Morkert, Vice President of Investor Relations. Please go ahead.

Jordan Morkert: Good afternoon, and welcome to Cable One’s Third Quarter 2023 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 contains 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 the forward-looking statements discussed during today’s call 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 or GAAP. The 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; and Todd Koetje, our CFO. With that, let me turn the call over to Julie.

Julia Laulis: Thank you, Jordan, and good afternoon, everyone. We appreciate you joining us for today’s call. Before we get into third quarter results, I’d like to touch on a few unique strengths of our business. More than a decade ago, we strategically pivoted our focus from linear video to broadband connectivity and business services, well in advance of our peers. Since that time, we have made significant investments in our network with the intent of anticipating and exceeding the evolving connectivity needs of our customers and communities. Fast forward to today, and we are proud to have engineered a robust and reliable network with enough capacity to handle up to 5x our customers’ current peak usage as well as a growing set of service offerings for residential customers and businesses of all sizes.

Equally as important is the footprint in which we deliberately chose to operate, which consists primarily of small cities and large towns across rural America. We continue to enjoy the relatively less competitive environment in these markets, and our position is further solidified by our incumbent status, enabling ongoing network upgrades at a fraction of the cost of new entrants. Above all, our strength lies with our dedicated associates, the majority of whom live and work in the communities we serve. Our associates are deeply invested in ensuring their cities and towns thrive, not just because it’s good for business, but because they have a personal stake in driving progress and making a positive difference in their communities. They are the driving force behind our unique culture and consequently, our tangible results.

These are just a few key differentiators that reinforce our confidence in the long-term future of Cable One. Looking ahead, we see significant runway for expanding our broadband reach, and we recognize the need to strike the right balance between ARPU and subscriber growth. As part of our forward-looking vision, we will continue to assess the next generation of products and services based on insights into customer needs. Our sights are set on continuing to compete fiercely while capturing new and profitable market segments. We are confident this strategy will position us to grow well into the future. Concurrently, we are navigating the final stages of decline in our video product. Having predicted this decline over a decade ago, we have less exposure to the video business today.

As we draw down on our remaining video subscribers, we are preparing for an environment without a video business, including planning for a reduction in our remaining nonprogramming support costs. It’s with these foundational strengths and forward-looking strategies in line that we share our latest performance results. In the third quarter, we delivered residential broadband revenue growth of 5.8% from the prior year, while our commercial Internet business grew even more rapidly. Adjusted EBITDA growth of 2.4% from the prior year with a margin expansion of 180 basis points to 54.7%. Capital expenditure decrease of 22.6% year-over-year, resulting in adjusted EBITDA less CapEx of $152.2 million, an increase of 22.6% year-over-year. In the third quarter, we demonstrated strong free cash flow conversion as a result of multiple years of efficient capital investment and significant network capacity, even in a more muted economic environment.

Looking at residential broadband, we saw a decrease of approximately 1,300 customers in the third quarter as compared to the second quarter of 2023. While we continue to experience the side effects of a subdued home move environment and some competitive pressures, there were signs of improvement as our overall connects increased relative to the past 3 quarters coupled with churn continuing near prepandemic loads. As I mentioned at the top of the call, one of our best opportunities over the long term is driving higher broadband penetration in our markets. We are better aligning ourselves to this growth opportunity by supplementing our prioritization of premium customers with a focus on new customer segments within our existing footprint. In practice, this could mean ongoing product enhancements at higher price points for our premium customers while targeting unique product offers and service models to more value-conscious customers to grow this segment profitably.

For example, during the last month of the quarter, we introduced a short-term promotion of $25 for 100 megs designed to attract value-focused market segments. That test promotion drove incremental new connects, while we saw the vast majority of new connects by product tiers with faster speed and higher price points than the promotional offer. We will continue to test and learn while targeting different market segments, maintaining a methodical approach that prioritizes profitable long-term results. Our high sell-in underscores the sustained demand for our premium speed tiers, a key factor in the 6.5% year-over-year increase in residential broadband ARPU. While pleased with this ARPU growth, our priority is a balance of subscribers and ARPU, with a current focus on expanding our subscriber base.

Turning to business services. Revenues fell slightly by 0.4% year-over-year. When excluding for video and phone, the connectivity side of the business is strong, showing growth in the quarter that outpaced even that of our residential broadband revenue. Despite facing economic pressures related to higher interest rates, our business services team continues to showcase resilience. Amid these challenges, our teams are relentlessly committed to evolving our data and fiber offerings, streamlining our operations and setting new standards in customer satisfaction through white glove service. As an illustration of our proactive approach, we are in advanced stages to upgrade wholesale fiber networks to 10 gigabits with several customers, a strategic move designed to extend contracts and boost long-term revenues.

Moreover, with the recent launch of Business Wi-Fi Plus, we are reinforcing our commitment to using technology to enhance customer experiences. An always-on mesh Wi-Fi solution tailored for small to medium-sized businesses, Business Wi-Fi Plus guarantees uninterrupted coverage, keeping businesses and their customers securely connected while delivering optimal speed and performance. Moving to a key driver of our success, our dependable advanced network infrastructure, we continue to see and meet the strong appetite for data with average customer demand reaching an all-time high of 646 gigabytes per month. Equally telling, more than 20% of our residential customers now exceed 1 terabyte of usage each month, an increase of 18% from the same period last year.

Our average network utilization during peak hours remained steady with downstream and upstream of 20% and 19%, respectively. The ample network capacity enabled by years of network investments fuel our confidence in our ability to stay well ahead of the consumption curve in a highly capital-efficient manner. Looking at wired competition. While we see competition continue to grow, in a majority of our markets, we do not compete against an Internet service provider that offers 100 meg speeds or higher. Regardless of speeds or technology, we operate with a mindset that every market is highly competitive. We will meet that competition by turning the focus to our customers and our communities, ensuring we provide the trusted service our customers have come to expect from Cable One.

Industry reports on mobile fixed wireless indicate that net adds may have peaked. As previously indicated, we have not experienced a material impact to our customer churn due to mobile fixed wireless competition. There likely is some impact to net adds as switchers from DSL or new entrants try fixed wireless as an initial solution. In the long run, we are confident that our fixed network will maintain superiority in terms of both speed and reliability while also delivering a substantial cost advantage relative to the significant capacity it can generate. With that said, we are well positioned to meet the growing data demands of customers efficiently and economically now and in the future. In the third quarter, we continued to execute against our digital transformation and integration roadmaps.

The expansion of our advanced customer contact center platform in Sparklight, following its initial launch in the Fidelity footprint, is driving greater efficiencies for our associates, enhancing performance across all key contact center metrics, including time to answer, service levels and associate productivity. We saw similar efficiencies for our Fidelity and CableAmerica brands as we transition them onto our financial ERP, moving us one step closer to a unified platform for all brands. These ongoing platform consolidations are reducing costs and enhancing operational efficiencies by merging overlapping systems into a single coherent structure. As we move closer to full integration of our brands, we continue to evaluate all opportunities to increase agility and eliminate pain points in pursuit of associate and customer goodness.

We also remain committed to assessing the various government funding opportunities. We’re exploring underserved areas adjacent to our markets, where our current infrastructure offers a significant edge for network extension. Our strategy is twofold. We opportunistically pursue grants that align with our return on investment criteria and advocate for allocating public resources to genuinely unserved or underserved communities. We recently demonstrated this commitment in one of our states where we defeated an attempt to provide government subsidies in an area where we already provide robust upstream and downstream bandwidth. Turning to our unconsolidated investments. Residential and business data customers collectively expanded by roughly 12,800 or 2.7% sequentially from Q2 of 2023.

These figures do not include the activities of Metronet or Ziply, where our investments are less significant. These results are a testament to the effectiveness of the straightforward strategy employed by our seasoned business partners, delivering premium broadband services across rural America. Before handing the call over to Todd, I’d like to take a moment to welcome Matthew Armstrong, who was recently appointed to the newly-created role of Senior Vice President, Residential Services. Earlier this fall, we restructured residential services as a business unit, similar to the business services side of the house. Matthew is responsible for the overall strategy and day-to-day operations of the residential services division, which includes marketing, brand and communications.

Matthew previously worked at Cable One from 2010 to 2014. In his prior role as Vice President of Strategic Planning and Finance, he led the pivotal effort to shift Cable One’s focus to residential Internet and business services and away from video. Before coming back to Cable One, Matthew worked at several startup ventures, including serving as Co-Founder and CEO of a startup in San Francisco. I’m confident he will be a tremendous asset as we double down on our work to grow subscribers and strengthen our competitive advantage. As disclosed earlier this week, we recently implemented other key changes to our leadership team that align with our focus on customer growth, digital transformation and a superior customer and associate experience. And now, Todd, will provide a full recap of our third quarter financial performance.

Todd Koetje: Thanks, Julie. Starting with revenue. Total revenues for the third quarter of 2023 were $420.3 million compared to $424.7 million in the third quarter of 2022, a 1% decrease. The decrease was primarily due to a continued decline in lower-margin residential and business video revenues. The growth of our foundational product lines in residential and commercial broadband continue to propel our business forward. As the demand for reliable high-speed broadband expands across all customer segments, so does confidence in our continued success and ability to strike the right long-term balance between subscriber and ARPU growth. For Q3 2023, our residential data revenues expanded 5.8% year-over-year when compared to Q3 2022.

Despite a decline of 0.4% in our total business services revenues year-over-year, data services within this segment experienced meaningful growth in the quarter. This growth is noteworthy as our reported business services still encompasses video and voice revenues, bearing similarities to our residential segment dynamics. Operating expenses were $109.7 million or 26.1% of revenues in the third quarter of 2023 compared to $120.5 million or 28.4% of revenues in the comparable quarter of the prior year, a 230 basis point improvement, driven largely by a $14.8 million decrease in video programming and franchise costs. Selling, general and administrative expenses were $92.7 million for the third quarter of 2023 compared to $86 million in the prior year quarter.

SG&A as a percentage of revenue was 22.1% for the third quarter of 2023 compared to 20.3% for Q3 of 2022. The year-over-year increase was primarily driven by increased labor and marketing expense. Adjusted EBITDA was $230 million for the third quarter, an increase of 2.4% when compared to the third quarter of 2022. Our adjusted EBITDA margin for the third quarter of 2023 was 54.7%, a 180 basis point improvement compared to the prior year quarter and a sequential increase of 20 basis points as we continue to drive growth in our higher-margin advanced broadband products. Capital expenditures totaled $77.8 million for the third quarter of 2023, which equates to 33.8% of adjusted EBITDA compared to $100.5 million or 44.7% in the prior year quarter.

During the third quarter, we invested $9.5 million of CapEx for new market expansion initiatives and $4 million for integration activities. Our year-over-year decrease in capital expenditures stemmed from our strategic working capital optimization initiatives and our proactive long-term network investment strategy. Adjusted EBITDA less capital expenditures was $152.2 million for the third quarter of 2023, an increase of 22.6% from the prior year quarter and 1.6% on a sequential quarterly basis as we benefit from ongoing capital efficiency and strong free cash flow conversion. As we continue to evolve and adapt to our changing landscape, our approach to capital allocation remains grounded in our core principles: to invest prudently in state-of-the-art, reliable broadband infrastructure and expanding our reach in and around the areas we already serve.

We will also continue to balance strategic acquisition and investment opportunities with a very disciplined and long-term-oriented balance sheet management philosophy. In the third quarter of 2023, we distributed $16.7 million in dividends, and we repurchased nearly 24,000 shares of our common stock for $16.5 million. We also repaid $54.6 million of debt in the quarter, $50 million of which was a voluntary repayment of our outstanding revolver balance. Subsequent to quarter end, we repaid an incremental $50 million in debt, bringing this voluntary reduction to $150 million in the last 5 months. As of September 30, we had approximately $240 million of cash and cash equivalents on hand. Our debt balance was approximately $3.7 billion, consisting of approximately $1.8 billion in term loans, $920 million in convertible notes, $650 million in unsecured notes, $388 million of revolver borrowings and $5 million of finance lease liabilities.

We also had $612 million available for additional borrowings under our $1 billion committed revolving credit facility. Our weighted average cost of debt for the quarter was just under 4.3%. Our net leverage ratio was 3.8x, and the vast majority of our borrowings are either fixed issuance or have been synthetically fixed under long-term contracts, considerably mitigating our exposure to the prevailing rate environment. As mentioned in last quarter’s call, our equity investment in Wisper was redeemed for total cash proceeds of nearly $36 million, and our investment in the Tristar SPAC was divested for total cash proceeds of nearly $21 million during the third quarter. Our investment strategy remains focused on pursuing opportunities in rural broadband that deliver growth and returns exceeding our benchmarks and aligning with many of the brightest minds and proven operators within the communications sector.

We’re committed to long-term value creation with these investments, whether through strategic monetization or future integrations. Finally, as a reminder, we posted trending sheets on our Investor Relations website, making it easier to see several quarters’ worth of sequential changes in many of our key operating and financial metrics. All figures are presented on a consolidated as-reported basis. With that, we are now ready for questions.

Operator: [Operator Instructions]. Your first question comes from the line of Brandon Nispel with KeyBanc Capital Markets.

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Q&A Session

Brandon Nispel: Julie, a question for you. HSD penetration has now declined for, I think, 4 consecutive quarters. Can you maybe outline what your thoughts are in terms of the longer-term opportunity and how you plan to sort of address getting subscribers back going through new pricing packaging promotional offers? And then hopefully, you could — I was hoping you could talk a little bit more about how the quarter progressed from an HSD net add perspective. You mentioned the promotional offer around 100 megs for $25. Could you sort of talk about what led to that decision? And if you care to opine on how 4Q is trending, that would be great.

Julia Laulis: You got it, Brandon. So I can’t comment on how others track their homes passed, but we are incredibly fastidious about it. And so as homes passed goes up, even if we keep our subscribers the same or grow slightly, the penetration will drop. And the homes passed database gets updated when we have new build extensions, for example, or if we have edge out opportunities, and you can imagine in those edge out areas that the homes come on or are put into the database and the billing platform way before they have the opportunity to be sold. So over time, I would expect to see the penetration from that issue resolve itself. In terms of what we see as a long-term opportunity for penetration growth, we think there is an abundant runway for us to grow penetration, and we are working on that with vigor.

You asked, I think, about commentary around new growth, and I think about the work that we’ve done in the past, say, 2.5 months, specifically, where we are just crazily focused on fiercely competing, I mean fiercely, approaching the entire footprint on a market segmentation basis, meaning that we’ll break apart different markets and customer types within those markets as well and address them very — in a very tailored manner. And we’re just, I guess, in short, realigning ourselves around growth. We’ve talked in recent quarters about realigning ARPU and growth. And obviously, those are the 2 important levers. And right now, we are focused on the growth part, the growth in units. As far as the third quarter, it was — there was an acceleration as we got closer to the end of the quarter and into the fourth quarter in connects, and I attribute that to us being willing to experiment and be very agile and try different tactics, and those are bearing fruit.

And so I feel quite positive about our fourth quarter.

Operator: Your next question comes from the line of Phil Cusick with JPMorgan.

Nikhil Aluru: This is Nik on for Phil. I know you guys have touched on how fixed wireless hasn’t really been a churn issue, but I was hoping you could touch on the kind of churn you may see from fiber and fiber overbuilders entering your markets. And to that extent, when you have visibility into an overbuilder in your market, how do you evaluate what your competitive response might be, whether that’s promotions more on the gross add front or maybe something more targeted for retention of the base?

Julia Laulis: So I think your first question was overall about churn from competition regardless of where it comes from. We do track competition by competitors. So our folks code in the reason why someone would choose to leave us. So we have that on a granular level to the extent that human beings don’t make errors. I’m not sure what your question was specifically about fiber churn, but let me spin to the next part, and then you can clarify and we can go back at it. But how do we evaluate the response in a holistic way? I mean it depends on how big the market is, where it’s situated, what the economy is like in that marketplace. Who’s the overbuilder? How are they financed? What are their pricing points? What do our nodes look like in those areas?

And we have an amazing network, but that isn’t to say that some of our markets aren’t in the process of being rebuilt — upgraded would be a more correct term. So it’s a holistic walk around the whole issue sort of evaluation. And what was — what do you need to hear…

Nikhil Aluru: Yes. I mean just obviously, you guys say, with fixed wireless, you’re not seeing much churn in your base. But in terms of fiber competition, are you seeing material churn when an overbuilder enters a market? And how — are you worried about trying to promote and maybe lock down and retain your sub base in those markets?

Julia Laulis: Yes. Okay. I got you. I got you. Thanks for that clarification. Okay. So let’s just start with overall churn is at prepandemic lows. So our churn is very low. Now I’m talking about the entire MSO, and that is inclusive of markets that are competitive. So that just tells you — I mean, common sense would tell you, in a competitive market and some like highly competitive markets, that you would lose customers. Yet overall, our churn is incredibly low. So just starting from that point. In competitive markets, obviously, people are enamored with choice. I personally have called customers that have left us for other providers and talked to them and said, I am not trying to sell you. I simply want your input. Why did you leave us?

And what could we have done differently? And honestly, at least in that small sample, it was really about a choice, like trying something different. Hey, haven’t had problems. I don’t think my price is going to be lower, but I thought I would try this out because there was a direct salesperson on my doorstep. Typically, we have had competition for, honestly, decades. I’ve been with the company over 24 years, and I can think of one marketplace that had a fiber overbuilder come in and a traditional HFC overbuilder come in, and we lost customers to begin with. That lasted for a period of time, and then things normalized and we began to grow again. I don’t know if that’s what it’s going to look like in the future or not. But certainly, that has been our experience in the past.

Nikhil Aluru: Got it. And if I could just push my luck here, anything you can give us on maybe the magnitude of net adds in the quarter from the 100 meg offer?