Cable One Inc (CABO) 2015 Q3 法說會逐字稿

Good morning and welcome to the Cable ONE third quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). With us today are Tom Might, CEO, and Kevin Coyle, CFO. please note this event is being recorded.

I would now like to turn the conference over to Kevin Coyle. Please go ahead, sir.

Thank you, operator, and good morning everyone and welcome to Cable ONE's third quarter investor call. We are excited to have you with us this morning as we review our third quarter 2015 results.

Before we proceed, I would like to remind you that today's discussion will 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 press release and in our most recent SEC filings. Cable ONE is under no obligation and in fact expressly disclaims any obligation to update 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 US 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.

Joining me today on the call is our CEO, Tom Might. With that, let me turn the call over to Tom.

Thanks, Kevin, and thanks everyone for joining us this morning. It has now been three years since Cable ONE's strategy began its pivot way from the video-centric triple play and started to focus on residential data and business services instead. Now that we have completed our first quarter as a standalone public company, I am very satisfied with that radical decision made in 2012, although it looks somewhat less radical today, which is what we had hoped for.

We concluded then that long-term cash flows from residential landline phone service and traditional video service would eventually enter into an inevitable decline, due both to shrinking units and shrinking margins. We also concluded that residential data and business services, with their potential for long-term high growth and higher margins, would be able to compensate for the video and residential phone decline. This is where the skating-to-the-puck analogy has been applied by some to our strategy.

However, in 2012, back then as disclosed in our Form 10, our residential data and [nation] business service revenues only equaled 37% of our total revenues. Video dominated our revenues in 2012 but much less so our cash flows. On the top line, the timing of our strategic breakaway seemed premature. In fact, video was still our largest revenue segment, even during the third quarter of 2015, three years later. But our strategy is focused on long-term free cash flow growth, not short-term revenue or unit growth. On the bottom line, which is what matters to us, our breakaway looks well-timed, based on a few high-level metrics I'll share. Even though video subs are down 36% since the end of 2012, our last 12-month adjusted EBITDA was up 11% compared to 2012, our third quarter adjusted EBITDA margin was up more than 450 basis points to 39.1 compared to 2012, our last 12-month total revenues were flat compared to 2012 and our last 12-month total operating expenses were down 6% compared to 2012. Now our residential data and business services revenue has increased from 37% to 48% of our total revenue.

Simply stated, every dollar of revenue that moves from residential video or phone to residential data or business services is worth multiple dollars of incremental operating cash flow, because the margins are so much higher. We could straddle, like others, and try to do both but we do not believe in straddling at Cable ONE. In 2012 no one would have bet that a 36% drop in video subs could equate to an 11% adjusted EBITDA gain and more than a 450 basis point margin expansion. This really is new math. There are several reasons why this method worked and might continue to work. First, by chasing PSUs with bundle discounts, we had attracted a lot of unprofitable customers and more particularly unprofitable starts. Without them, we make more money. Astute and disciplined lifetime value practices make us see cable subaccounts in a whole new light. And second, by re-examining the traditional fixed cost model of cable, we determined that the majority of indirect costs are actually variable, or at least semi-variable.

For example, our third-quarter truck rolls were down 36% compared to the third quarter of 2011. That's when we were still aggressively pursuing a triple play. Having approximately similar revenue, with 36% fewer truck rolls, was a great way to expand margins and make more money. Third, on the revenue side, business revenues were up 13% this quarter over last year and showed no fatigue. Residential data revenues were up 10% this quarter and that does not include the 10% rate adjustment we made in October, which was our first in nearly 5 years and done with a simultaneous doubling of speeds. And fourth and last, we are producing these past results even though over 70% of our new residential starts are now data only or HSD only starts. That's right, a one pack. I know that flies in the face of the powerful triple-play math that we all fell in love with 10 years ago but bundle math is changing.

As attracting and retaining data-only customers had become a central tenet of our strategy, I want to share how aggressively we are pursuing the business. We doubled our standard speeds this month from 50 Mb to 100 Mb -- actually last month -- which is the highest standard speed in the industry, I believe. We just announced a companywide 1 Gb launch which we anticipate will be available as a premium speed to the majority of our homes passed by the end of 2016. I believe this to be the broadest 1 Gb launch of any MSO or telephone company to date. HSD customer satisfaction and renewal intentions were extraordinarily high even before these steps but we are leaving nothing to chance.

We have invested heavily in data capacity over the last three years to make all this possible. First we completed our four-year all-digital conversion -- or we will by next year -- to free up significant channel capacity for HSD bonding. Second, by increasing from 4-channel bonding to 24-channel bonding in almost every system by the end of this year and then to 32-channel bonding in almost every system next year. Third, by more than doubling the number of service areas or nodes so there are only half as many modems sharing each node today. And fourth, by replacing every CMTS in the Company.

As for business services, annualized revenues have been growing nearly $1 million per month for two years and we are over 11% of total revenues in the past quarter with cash flow margins are very high. About 90% of the story so far is just SMB sales and we are only up to an estimated one-third market share of available SMB dollars, leaving lots of room to continue growing. We are also investing heavily in enterprise staff and product launches this year and next, where we have scant market share today but see significant potential. To sum things up, we made some strategic bets to be better positioned for the long run when residential video and phone wane. Three years later, those bets are starting to pay off and last quarter was just a good example.

Thank you. Kevin?

Thanks, Tom. Before I discuss our financial results, I wanted to point out some changes in our operating statistics which are somewhat confusing. As we mentioned in our previous investor call, we've been converting to a new billing system over the past year. That conversion is now complete but this has caused several fluctuations which I'd like to highlight.

First, we had an increase in homes passed primarily attributable to converting data into our new billing system. The new system counts each unit in a multifamily dwelling that is served by a bulk account as one homes passed whereas our prior billing system counted each bulk account as a single home passed. For example, if an MDU has 200 units it is now counted as 200 homes passed versus one in the previous billing system, so there has been an expansion in homes passed. Second, you will see that we had significant growth in both business service customers and revenues but our business PS use decreased in the third quarter of 2015 versus the third quarter of 2014. The decrease in business PS use was also attributed to our new billing system, as it counts each business customer relationship as a unique business address, as a single customer, whereas our prior billing system calculated multiple relationships based on revenue generated at an address. For example, if you had two phone lines in one office, the old system would have counted that as two PSUs versus the new system now counting it as one customer. So in summary, the change in billing systems accounts for unusual fluctuations in both homes passed and business PSU counts.

Turning to our financial results, looking at the third quarter of 2015 financial results compared to the third quarter of 2014, total revenues were $198 million, a slight decline of $1.5 million or 0.7%, due primarily to residential video and voice customer losses and partially offset by increases in both residential data and business service revenues and the impact of a video rate increase. Residential video service revenues declined $6 million or 6.9%, due primarily to basic video customer losses and partially offset by the impact of a video rate increase. As Tom already mentioned, we are continuing our shift from a video-centric company to an HSD and business services-centric company and we had solid cash flow growth and margin expansion as both HSD and business services became a larger segment of our overall revenues and cash flow. Residential data service revenues increased $6.8 million or 10.2%, due primarily to a 2.1% increase in residential data customers and also to an increase in customers subscribing to premium tiers. Business services likewise had tremendous growth, as revenues were $22.4 million, an increase of $3 million or 15% as compared to the prior year-end period. In total, residential data and business service revenues grew to 48% of our total revenue compared to 43% in the prior-year period. Also, non-video customers grew from 31% to 42% of total customers. Residential voice service revenues declined $3.2 million, due primarily to declines in residential voice customers, and advertising sales revenues declined $1.4 million compared to the prior year.

Turning to operating costs and expenses, the third-quarter total operating costs and expenses decreased $3.9 million or 2.4%, due primarily to decreases in operating expenses of 5.2% and in selling, general and administrative expenses of 2.9%, partially offset by increased depreciation expense due to our capital expenditures of 4.9%. The largest factors affecting expenses were reductions in programming costs, customer bill processing costs, salary and wages and franchise fees. These decreases were partially offset by increases in depreciation, group insurance and some equity-based compensation expense.

Focusing on adjusted EBITDA, as I mentioned previously, we had a solid third quarter from both a cash flow and a margin perspective. During the third quarter, adjusted EBITDA was $77.4 million, an increase of 6.2% from the previous year. This was due to the impact of increases in both residential, HSD and business service customers and a video rate increase. Also note there was significant margin expansion from the prior year, as adjusted EBITDA margin grew over 250 basis points from 36.5% to 39.1%. I think this clearly demonstrates the shift to our higher-margin HSD and business service components.

Turning to capital expenditures, our capital expenditures totaled $31.4 million in the third quarter compared to $52.3 million during the third quarter of 2014. This decrease was primarily due to the decline in spending for customer premise equipment and offset by four major initiatives which Tom already mentioned -- our all-digital conversion, remaining plant upgrades to 750 MHz, increased channel bonding and increased node splitting and fiber deployment. We expect significant expenditures for the remainder of 2015 due to the completion of most of these projects and we are still forecasting that capital expenditures for 2015 will be approximately 20% of revenues in the $155 million to $165 million range. As we mentioned in our second-quarter investor call, with the completion of most of these capital initiatives by the end of this year, we expect capital expenditures to return to historical levels in the mid to high teens after 2015.

From a liquidity standpoint, we are in very strong position. During the third quarter of 2015 our cash and cash equivalents increased by $138 million versus the quarter ended September 30, 2014 and at September 30, 2015 we had approximately $145 million of cash on hand compared to only $6.4 million at December 31, 2014. As I discussed in the last quarter, in conjunction with our spinoff we incurred indebtedness in an aggregate principal amount of $550 million which is comprised of $450 million of 5.75% senior unsecured notes due 2022, a five-year revolving credit facility in the aggregate principal amount of $200 million and a five-year term loan facility in the aggregate principal amount of $100 million. Borrowing from our credit facility is currently at LIBOR plus 1.5%. With these financings, our current debt to cash flow is approximately 1.8 times on a last quarter annualized basis and only 1.3 times on a net of cash on hand basis. So we have a very compelling capital structure with low leverage, no near-term maturities, the average life of our debt is 6.6 years and our weighted average cost of borrowing is only 5%.

So in summary, our results are solid. We are transitioning to an HSD and business services-centric company while harvesting our video business EBITDA. Our revenue is steady and consistent and the growth in both HSD and business services customers has grown our cash flow and margins compared to the prior year. Also our free cash is a significant asset. During the quarter, our free cash flow was $46 million, which is a 124% increase from the prior year. Our conversion ratio is historically in the 50% range and we expect to generate a significant amount of free cash flow for the year.

With that, operator, we are now ready for questions.

(Operator Instructions). Stephan Bisson, Wells Fargo.

Good morning, guys. I have a couple of questions. First, on the high-speed data rate increase for Q4, I know it was announced on 10/1 and put into place then. Does it come in as customer bills reach their month? So if somebody has their standard bill on say the 20th, is that when the increase goes into effect or is it prorated for the entire month of October?

We have four billing cycles so it will come in four ways.

Great. Then on terms of uses of cash, you guys are clearly generating a ton of cash flow and in the past you have spoken about making some small tuck-in acquisitions and you're paying your dividend. Is there any update as to primary uses of cash at this point?

No, not yet. We are working hard on it because it's a very big task ahead. We are in a very good position and we have ideas but we are not at the point where we are ready to share those ideas.

No problem. That's it for me. Thanks so much.

Phil Cusick, JPMorgan.

Hi, guys. Just to follow up there. The $5 price increase rolls through the entire customer base, right?

At least over 90% of our residential HSD subscribers will see it in the month of October.

And again, that rolls through October. So let's say half a month there or full month in December?

Right.

That is correct.

Okay. And then second, have you seen any pushback by customers since that price increase went through?

Actually October was our -- this is not in our release but I don't think there's any problem since I'm sharing with everybody. October, we had our highest HSD subscriber gain in 15 months. Now, I think some of the hit could come next month, but the first month of the increase was announced in September. Very good.

So speaking of that, I think one question that people always have when I talk about Cable ONE is why doesn't broadband grow more? We didn't see much this quarter either. Sounds like October was a good month. But how do you think about the potential to accelerate broadband subscriber growth next year?

Well, I think this call came up on the last quarter. It certainly came up --

I think you're going to get it a lot.

And the answer is the same long-term. We think about it long-term. If we can get a couple of percent of subscriber growth, a couple of percent of rate increase -- granted, we are catching up for five years of no rate increase. But on average, if we can get a couple of percent of rate increase and a couple of percent of data consumption, you're up in the high single-digit growth rate over the long term, could be higher in one year or this year because of a rate increase or because data consumption is going a little faster but that -- we are looking to add three small percentages together to get a meaningful long-term single-digit, high single-digit growth rate out of HSD, which we think is a terrific way to run the business.

The other thing I would say -- we do not discount our HSD hardly at all because we think it is the premium product. I'll give you perhaps too grandiose of an analogy but it's been reported that Apple, with only 20% market share, gets 92% of the profit out of the smartphone business. Now, we do have the dominant market share in units in our space or in our markets and we darn well have the dominant share of the profitability coming out of wired internet service in our markets and that's the way we like it.

Okay. Then one more for me. You and I have talked about this one as well in the past but how are your thoughts on capital intensity long-term? Is there a specific dollar number that this business is going to need every year? I would think that as video declines that dollars of capital could come down but how do you think about that relating to percentage as well?

We mentioned that this year will be the finish of the large capital expenditures, that capital will be in the $155 million to $165 million range, which is 20% of revenues. We are forecasting that going forward, with the completion of most of these major capital initiatives, we should return to historical levels which are in the mid to high teens, whether it's 15% to 17%, somewhere in that range so we are forecasting that they will go down. Again, we are fully cognizant of the fact that we want to stay ahead of the curve from a technology standpoint on HSD. So they're not going to go away but they are going to go down.

Got it. Thanks, guys.

(Operator Instructions). Craig Moffett, MoffettNathanson.

So Tom, I want to go back to the cost structure for a second. You described a steep drop in the truck rolls, for example. Your total costs or your operating expense I think you said was down just a little over 5% year over year. But how do we think about that going forward? I mean, how much cost reduction do you think you can get as your video base shrinks? I know there are a lot of moving pieces with richer packages for the programming of the customers who are left offset by fewer truck rolls and that sort of thing. Could you just help us get our heads around kind of the trajectory of the cost structure?

Rather than being specific, let me talk in general terms. We started something here in 2008 called Operation Strategy. If you are familiar with the Danaher company, you may have heard of the Danaher Way. We sort of borrowed from them. We have a whole team of industrial engineers -- maybe Altice-like in some ways but it's over a long period of time. I am an industrial engineer by chance -- or by confidence, rather. So we have been methodically applying customer satisfaction improving but cost reduction methods now for seven years and we do not think we are done. Let me leave it at that. We have a full head of steam. In fact, we're hiring -- trying to hire even more industrial engineers to cost reduct this.

So we are not slashing costs. We are not -- we are smartly reducing the need for customer contacts, is the main core piece of the strategy. 70% of our labor and I believe most cable companies' labor is customer contact labor. I'm looking at a slide from our roadshow, just to remind me. We said there that just in four years from 2010 to 214 we reduced over 400, over 21% of our customer contact headcount. Again, we started in 2008 so we were really rolling at that point. So that is an ongoing process of reducing smartly labor. And of course we have some volume losses which also reduces some of that.

We do not lay people off. It's all done -- in fact, they help us. Our associates help us do this because we don't lay them off. It's been a very big success story here but we just -- we have a big head of steam. We're going to continue doing this for quite some time.

Do you have a sense -- do you manage it to a cost per customer or do you think of it as a percentage of revenues or how do you think about the longer-term trajectory?

Well, I don't want to give the guidance on the trajectory but we look at both and we've tracked both for properly a decade, both per PSU and as a percentage of revenue, because we manage the place accordingly. It's a very important part of the psyche of the Company, is managing operating non-direct costs, the labor and other expenses, as a percentage of revenue and as a dollar per PSU. That's sort of the key long-term metric for this Operation Strategy effort. We've gotten very good at it. We also in our equity roadbook pointed out that if you take all CapEx and OpEx for the last -- I we did -- I'm looking at 2010 to 2014, a five-year window for everybody who had public numbers. Our all-in OpEx and CapEx per PSU was right at Comcast's level, substantially below Cablevision, Suddenlink and others. That's not by accident. Again, it's a very strong part of the culture that every associate is involved in.

Very helpful, thank you.

So the culture's there, the culture's strong, the culture's not going to change so I'll have to leave you at this point to make your own projection.

Thanks, Tom.

Phil Cusick, JPMorgan. Go ahead, sir. Mr. Cusick, your line is open, sir. I'm not sure if you have your phone on mute.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Tom Might for any closing remarks.

Again, we are very satisfied with the third-quarter results as an example of what we think this three-year effort strategically is leading to. There is an interesting transitionary period when you start out with 37% of your revenues representing what you think is the future base of your company. It takes a while to sort of get the battleship, the economic battleship or the financial bottom line battleship turned around but I think this quarter is a good example of that effort at this point. Thank you.

Thank you, operator.

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