Cable One Inc (CABO) 2016 Q3 法說會逐字稿

Good day, and welcome to the Cable One CABO earnings report Q3 2016 conference call.

(Operator Instructions)

Please note, this event is being recorded.

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

Thank you, operator. Good morning, and welcome to Cable One's third-quarter 2016 earnings call. We're excited to have you with us this morning, as we review our results for the quarter.

Before we proceed, I'd like to remind you that today's discussion may contain forward-looking statements relating to future events and expectations. You can find factors that could cause Cable One's actual results to differ materially from these projections listed in today's press release, and in our 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 at www.ir.cableone.net.

Joining me on today's call is our Chairman and CEO, Tom Might. And with that, let me turn the call over to Tom.

Thank you, Kevin, and good morning to those listening. Third-quarter adjusted EBITDA rose almost $10 million and nearly 13% versus last year, which was another fine quarter. That puts us $262 million for the year so far, up $32 million or 14%. Adjusted EBITDA margins have expanded over 300 basis points from 39% in Q3 last year to 42% this past quarter.

Our adjusted EBITDA less CapEx performance was even stronger, as our CapEx spending plan slowed down. For the year-to-date period, adjusted EBITDA less CapEx is up $40 million, which is almost 31% higher than year-to-date versus last year. This is a high level evidence, I think, of our four year-old strategy to focus on residential data and business services, which have higher margins and higher growth rates, while harvesting the video and phone businesses which do not. And it continues to work well.

I have reviewed our strategy and like on past earnings calls, so I will take a pass on that today. When we first imagined strategically changing our focus, residential data and business services only represented about 30% of our total revenues. Today at 55%, they are a majority of total revenues, and they're still rising, up from 48% this time last year. We think that bodes well for the future.

Now somebody on the call usually asks, where video subcounts are headed with our current strategy? I always decline to give guidance, but suggest you follow the historical bread crumbs. In anticipation of the question, I will point out that we were down 86,000 video subs in Q4 last year, 70,000 in Q1 this year, and 60,000 in Q2 this year. And now, 61,000 in Q3 of this year. You can see the trend with our video subcounts. You can also see how video sub losses have not lowered our profitability, that's just the opposite.

With the majority of revenue now coming from the faster growing products, and the slowdown of video sub losses, it is our expectation that we have hit a small inflection point in revenue. Our total revenues are up 1.5% year-to-date, versus being down 1.6% year-to-date last year. Add a little revenue growth to our sustained margin expansion, and this is consistent with the long-term growth expectations I've been outlining before.

However, year-over-year quarterly comparisons will get tougher for many reasons. We took a 10% residential HSD increase last October, our first in five years, but no HSD increase this year, particularly this October. Total operating expenses were down $24 million or 7% in the first half of 2016, partially due to dual billing systems in the first half of 2015, and lower corporate charges as a stand-alone company after our July 1, 2015 spin. Those favorable year-over-year comparisons are now gone. Nonetheless, our regularly declining programming bill is now lower than it was in 2009.

Our operations have been consistently improving since 2008, when we hired our first industrial engineer; first, that is other than me, since that's my degree as well. For example, our truck rolls are down 57% from 2008, and phone calls are down 39%, since we moved all agents into a virtual company-wide call center in 2011. Head count last quarter was down 7.6% or 157 associates versus a year ago. And we've reduced our bad debt from 1.4% at its peak to 0.3% of revenues.

As I said in the past, we are seeking out attractive M&A and organic growth opportunities, given our debt capacity. We are continually searching for great deals that would be accretive and benefit our shareholders. Like past calls, we are not going to make any further comments about M&A today. With that, let me turn it back over to Kevin for a more detailed review of our results.

Thanks, Tom. As Tom already mentioned, we are very pleased with the results we've achieved during the year-to-date, including our strong performance in the third-quarter of 2016. First, let me share a few highlights from the quarter. Tom already mentioned some of these, but adjusted EBITDA grew by 12.6%, with a margin of 42.4%. Our adjusted EBITDA less capital expenditures increased by $13.4 million in the quarter year-over-year or 28%. Residential data revenues increased by almost 19%. Business services revenues increased by over 13%. And residential data and business service revenues now comprise almost 55% of our total revenues. And as Tom mentioned earlier, total revenues now quarter to quarter grew by 3.7%.

Now getting into the detailed results, starting with revenues, total revenues increased $7.3 million or 3.7%, due primarily to increases in residential data and business services revenues of $13.7 million and $3 million respectively as a result of the customer mix shift towards these two products, which now comprises, as I mentioned earlier, 55% of our total revenues. These increases were partially offset by decreases in residential video and residential voice revenues of $7.4 million and $1.5 million, respectively. The declines in residential video and residential voice revenues were primarily attributable to residential video customer losses of 13.8%, and residential voice customer losses of 12.8% for the 12 months ended September 30, 2016.

Residential data service revenues increased $13.7 million or 18.8%, due primarily to a rate increase taken in the fourth-quarter of 2015, an increase in residential data customers of 1.9% for the 12 months ended September 30, 2016, a reduction in package discounting, and increased subscriptions to premium tiers by residential customers. Residential video service revenues declined $7.4 million or 9.1%, due primarily to residential video customer losses of 13.8%, and partially offset by a broadcast television surcharge imposed in the second-quarter of 2016. Residential voice service revenues decreased $1.5 million or 12.3% due primarily to a decline in residential voice customers of 12.8% for the 12 months ended September 30, as more residential customers have discontinued landline voice service.

Business service revenues increased $3 million or 13.2% due primarily to growth in our business data and voice services to both small and medium-sized businesses and enterprise customers. Total business customer relationships increased 9.6% for the 12 months ended. Overall, business services comprised 12.4% of our total revenue for the third quarter of 2016, compared to 11.3% of our total revenues for the third quarter of 2015. Advertising sales revenues declined $0.8 million or 11.2%, due primarily to the negative impact of decreased video customers on the number of viewers available to be reached by advertising spots.

Turning to our operating costs and expenses, operating expenses increased $1.4 million or 1.9%, due primarily to a $2.9 million increase in non-programming operating expenses, partially offset by a $1.5 million decrease in programming costs, which primarily resulted from a 13.8% reduction in residential video customers. The increase in non-programming operating expenses was primarily attributable to increases in the net impact of changes in capitalized and contract labor of $1.3 million, as the mix of plant-related labor shifted to repair and maintenance activities, fixed asset disposals of $0.8 million, increases in backbone and interconnectivity fees of $0.6 million, and software maintenance of $0.2 million. Operating expenses as a percentage of revenues were 37.3% and 38.0% for the three months ended September 30, 2016 and 2015, respectively.

Selling, general and administrative expenses increased $1 million or 2.1%, due primarily to increases in equity and cash-based incentive compensation of $3.2 million, acquisition-related costs of $2.5 million, and advertising and marketing costs increases of $1.3 million. These were partially offset by decreases in salary, wages and benefit costs of $2.4 million, due to decreased head count and lower group insurance costs. They were also reduced by processing costs which are lower for our customer billing, following the completion of our billing conversion of about $2.1 million, and general insurance costs of $1.2 million. So now selling, general, and administrative expenses as a percentage of revenues were 23.7% and 24.1% for the three months ended September 30, 2016 and 2015, respectively. Other expense decreased $4.5 million, due primarily to a $4.2 million net gain on the sale of a cable system.

Looking at provision for income taxes, provision for income taxes increased $7.9 million or 66.2%, due primarily to higher taxable income and certain pre-spin tax items recorded during the third quarter, including a $4.1 million adjustment related to pre-spin deferred taxes and other tax calculations. These adjustments are not material to our projected annual results, and we do not expect similar adjustments in future quarters. The increase resulted in an effective tax rate for the quarter of 48.6% for the third-quarter of 2016, compared to 38% for the same period last year.

Adjusted EBITDA of $87.2 million increased by 12.6%, and adjusted EBITDA less capital expenditures increased $13.4 million or 28.2%. For the quarter, our conversion rate defined as adjusted EBITDA less CapEx as a percentage of adjusted EBITDA was approximately 70%. This is due to the 12.6% increase in adjusted EBITDA, and the lower capital expenditures during the quarter.

Turning to capital expenditures, capital expenditures totaled $26.3 million and $30 million in the third quarters of 2016 and 2015, respectively. This represents approximately 13% of revenue for the third-quarter of 2016. Meanwhile, year-to-date capital expenditures of $91.3 million represent about 15% of revenues. We continue to believe that capital expenditures as a percentage of revenue will be in the mid-teens for the full year 2016.

Turning to liquidity. During the nine months ended September 30, 2016, our cash and cash equivalence [increased] by $4.5 million. And at September 30, 2016, we had approximately $124 million of cash on hand, compared to $119 million at December 31, 2015.

On share repurchases, we purchased 18,629 shares at an aggregate cost of $9.6 million during the quarter, and have repurchased a total of 164,532 shares through September 30, 2016 at an aggregate cost of $72.5 million. These repurchases represent approximately 2.9% of total shares.

In conclusion, our solid financial performance has continued through our third quarter, fueled by the continued growth of both residential data and business services. With that, operator, we are now ready for questions.

(Operator Instructions)

Our first question comes from Phil Cusick of JPMorgan. Please go ahead.

Hey, guys. Kevin, I apologize, you went through a lot there really fast. Can you say again what the buyback this quarter was?

Of shares, sorry?

Yes.

Hold on a second, 18,629 shares at a cost of $9.6 million.

Okay. And how should we think about the Board's attitude right now to leverage and capital return? I think I asked this question last quarter. But it seems like you're not going back -- buying back at the pace that you could, given the cash flow and the leverage. What else is the Company thinking about doing?

(multiple speakers) Go ahead, Tom.

I'll take it, Kevin. Yes, we said every quarter, we were looking for good M&A opportunities, that would be our first preference, organic or inorganic, we're examining a lot of both. We'll continue to use share repurchases as we see fit, as it best benefits the shareholder, based on conditions of each quarter, but we don't feel compelled to do either on any specific time table.

Okay. I know there's at least one small cable company out there for sale this quarter. Did you look at that? Was it an issue of price? Did it go to someone else?

I'm not going to make any comments on M&A. Sorry.

Okay. And you didn't take a price increase like last October, as you pointed out. Should we assume the prices are stable for a while here?

I'm not going to tell you when we'll take our next one. We took five years to take the last one. We've taken only one in six years. So it was little bigger than usual, but we're not going to at this point, state what our plans are for 2017, because we've not told customers.

Understood. And where are we on the high speed data rate increase uptake? Are we pretty well fully baked in the third quarter, or is there still more to roll in?

It should have been effective about the middle, since we have four billing cycles. My understanding is it's halfway through October is probably when it was effective.

That's correct, Phil. It would have taken, effectively on our cycle billing, the middle of the October of last year, would have been the full effect of it.

Got it. Okay. Thanks, guys.

Thank you.

Our next question comes from Craig Moffett of MoffettNathanson. Please go ahead.

Hi. If I could just stay with the topic, that Phil raised about the price increase. So how do we think about, in the absence of the significant uplift in HSD pricing that we've had over the last 12 months, how do we think about the near-term revenue trajectory for the business, just really over the next two quarters, if I think about the lapping or anniversarying the price increase?

Well, Craig, we're not obviously going to give explicit guidance, though we can tell you the numbers that are in the past quarter, the percentages. We're up about 18% in HS -- residential HSD. We did take a 10% rate increase across all HSD customers last year. We have -- these are all round numbers, 2% volume. So that leaves something like 6%, which is a combination of tier premiums and reduced discounting. So obviously, you know the timing of the rate increase, and you know the size of our subscriber growth rate that I just mentioned. So you can just use that to do your math as best you can.

Is there any offset of -- as you start to move to higher speeds, do you expect a faster up tiering in your customer base for -- as you move toward the 100 megabit per second offering?

Well, it's been out there for a year now. So if so, it's -- I think that was September a year ago, that we doubled our speeds, so that would already be baked in.

So no real change in that trajectory then?

Well, again, it's been four quarters, since we've doubled the speeds so they're, we can go back and look from third quarter to fourth quarter last year to see if there was a change. I don't have it in front of me. You can look that up. But no, there would have been a -- only do for that reason, but that's when you would have seen it, between third quarter and fourth quarter of last year, if there was a change.

Got it.

(multiple speakers) Although, that coincided with a rate increase, so that would be difficult to tease out, I guess.

Understood. And then, if I could just ask one more question. Have you seen any change in the posture of your programming partners over the last 12 months as you -- in your negotiations and conversations for renewals, given the strategy that you've taken with respect to video?

Well, we buy most of our programs through the NCTC, so we're not negotiating directly for too much of it. And to my knowledge, but I don't have a perfect knowledge on this as you know, on those that we buy directly.

All right. Thank you.

Our next question comes from Stephan Bisson of Wells Fargo. Please go ahead.

Good morning. A couple, if I may. The first on the merger -- or not on the merger, on the acquisition-related costs, is that something we should be thinking of as recurring at all, or is it going to be a one-off as things come along to look at?

It's not a recurring -- (multiple speakers)

Yes, let me take that. Stephan, this is Kevin. It's not a recurring cost. They happen from time to time, as we've already mentioned. We don't comment on specific M&A opportunities or expenses, but we're continually evaluating potential targets, using a disciplined and patient approach. But if it was recurring, we wouldn't have made an adjustment for it.

Got it. And then it looks like sequentially, SG&A was up even excluding that expense. Are we kind of at a pivot point? You had mentioned a lot of the comparability -- different. But is this kind of a more standard run rate to think about going forward?

I think, it's a quarter-to-quarter thing. I mean, we had some additional marketing in the quarter. We had some additional equity and cash-based compensation in the quarter. And obviously, as we already discussed, we had the $2.5 million of acquisition-related costs. So there are some unusual things in the quarter, and the quarters vary. They're not all going to be the same.

I think we're still on a good trajectory. As Tom mentioned, and I think we both mentioned, we have significant reductions in head count that caused salary, wages and benefits to be down $2.4 million. So I think we're still headed in the right direction. We're very frugal and cost-conscious, and there are certain items within the quarter that caused the quarter to be up on the SG&A.

Got it. That's all for me. Thanks so much.

(Operator Instructions)

Our next question is a follow up from Phil Cusick. Please go ahead.

Hey, guys, thanks. Can you just expand on the better video numbers this quarter? How much of that was driven by lower churn, and how much by improvements in gross adds?

I don't have that data in front of me. We don't publish our churn data.

Maybe just qualitatively if you can?

What I have in the past directionally is, when we implemented the harvest video strategy four years ago, we took a lot of very big steps. We -- they caused some precipitous declines, which was okay with our strategy, like dropping Viacom, like dropping our entire door-to-door sales force in October of 2013, I believe. We (inaudible) [9]% of our starts, they went away in one day. So we've taken a couple of larger increases, because we were sort of behind the programming cost curve. So those big shocks are no longer happening. And I would -- I feel that this -- the absence of those size of shocks are the reason for the changes in the trajectory.

Okay. Then I misspoke earlier, I asked about data ARPU, but I meant to ask about video ARPU. Is that -- should we assume that sort of half of the price increase from the second quarter, is now reflected in the third quarter numbers, or is it fully in?

It's fully in, Phil.

Okay.

It was a $4.90 increase back in the first part of June. So it's fully in the price.

Understood. Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tom Might for any closing remarks.

Thank you. I thank all of you for following Cable One. The whole Cable One team, not just Kevin and I, are proud of our success as a stand-alone public company. And I'm so happy that our associates continue to embrace the very unique Cable One way. We just finished by coincidence, our annual associate attitude survey, which I've been doing for 20 years, and they have never been more pumped up in my 24 years of running Cable One. So thanks to all of you out there listening in who are associates. And thank you, and we will speak to all of you next quarter.

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