Cable One Inc (CABO) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to the Cable ONE Q4 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Steve Cochran, CFO. Please go ahead.

Thank you, Danielle. Good afternoon, and welcome to Cable ONE's Fourth Quarter and Full Year 2018 Earnings Call. We're glad to have you join us as we review our results.

Before we proceed, I would like to remind you that today's discussion may contain forward-looking statements 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 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. 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.

With that, let me turn the call over to Julie.

Thank you, Steven. Good afternoon, and we appreciate you joining us for today's call. I will review quite a few highlights, as it has been a very busy 3.5 months since we last talked. Then, I will hand the call back to Steven for a full recap of our financial performance.

Before getting into results, I want to welcome our 92 new associates from Clearwave. I will talk more about the acquisition a little later, but we are so excited to have them as part of the Cable ONE team.

I would also like to acknowledge 2 groups of associates, and they are our people in and around Taylorville, Illinois, who experienced 2 severe tornadoes on December 1, and our associates in Columbus, Mississippi, who were hit by a devastating tornado last Saturday. Despite personal impact and loss, these dedicated associates worked tirelessly to get our customers back up and running, in both cases, restoring service to more than 90% of our customers in just 24 hours. Our associates took care of each other and our customers, exemplifying the true Cable ONE spirit.

Now turning to our results. Once again, I am glad, if I just say, that we were able to deliver strong operational and financial performance in 2018. Some Q4 highlights include year-over-year increases in total revenues of 4.7% and adjusted EBITDA of 8.8%. In line with our long-term strategy, this impressive growth was led by our higher margin residential HSD and business services products where we saw revenue increases of 12.3% and 10.3%, respectively.

These products now comprise approximately 62% of our total revenues. As we discussed on the last call, we accelerated our marketing spend in the third quarter in order to, one, take advantage of a more active buying season; and two, reduce call volumes during the go-live phase of our NewWave billing system conversion in early November.

I'm pleased to say that the conversion went incredibly well, aided in part by the thoughtful preplanning to reduce the customer contacts around the time of the cutover. Meanwhile, the reduced Q4 marketing cost positively impacted adjusted EBITDA for the quarter, and we still drove an increase of more than 2,700 residential HSD PSUs sequentially from Q3. For the full year, we saw residential HSD PSUs grow 2.7%, in line with our expectations.

Our residential HSD ARPU was up 9.4% year-over-year. That growth continued to be fueled by a mix of marketing, our modem rental rate adjustment in the first quarter of 2018, increased subscriptions to premium tiers, usage-based billing and contributions from further alignments of the Northeast Division. While we expect to see residential HSD ARPU continue to increase from several of these mix-related drivers and our recent pricing and packaging changes, keep in mind that we have not implemented any 2019 residential HSD service or equipment increases as we did with the modem rental adjustment in the first quarter of 2018.

I'd like to provide a bit more detail on the residential HSD pricing and packaging changes we've implemented. As of January 2, we launched our new pricing and packaging across our entire legacy Cable ONE footprint and the majority of our NewWave footprint, in line with and informed by the testing we conducted throughout much of 2018.

We simplified our core HSD plans, offering lower pricing and higher speeds across our premium tiers, as well as shifting usage-based billing from upgrades to overage charges. Our $55 flagship product continues to offer 100 MB download speeds with a 300 GB data plan. Our $65 plan now provides 200 MB download speeds and 600 GB of data. And we've introduced an $80 service, which gives customers 300 MB downstream with 900 GB of data; additionally, customers have a new option to purchase unlimited data for $40 per month.

While it is still early, we are encouraged by the results so far. As a reminder, one of the drivers for this change was to improve overall customer satisfaction by allowing customers to more easily self-select the right package for their needs and reduce churn. When we compressed the price variance between the tiers, we were pleased to see the rate at which customers chose to take those higher tiers when given that option. This actually resulted in a higher-than-expected lift in ARPU.

Additionally, we are now marketing an introductory tier at 15 MB with a 100 GB data plan for $30 that is intended to help us better understand what we believe is currently an underpenetrated customer segment. This offer has been an effective call to action, and we have not seen it cannibalize customers from our flagship 100 MB tier. In fact, it has helped to drive connects for higher tiers in most cases as these customers are taking our flagship product once they understand the value proposition. Through tools provided to us by our business intelligence team, we will continue to monitor the impacts and adjust as needed.

As I mentioned earlier, our successful billing system conversion means we are now in position to realize additional synergies related to the NewWave markets. These synergies will be realized throughout the year and will allow us to continue to expand our adjusted EBITDA margins. The conversion was truly a team effort with roughly 500 of our associates involved in the project in some capacity and many thousands of hours invested to ensure a smooth and successful transition. My sincere thanks to our team for a job well done.

In order to execute on both the launch for new pricing and packaging as well as our billing system conversion, we pushed our video rate adjustment back 1 month in comparison to prior years, which will impact year-over-year comparability in the first quarter.

On the business services front, we continued to see strong performance and growth, but the biggest news in the quarter was our acquisition of Clearwave. The deal closed on January 8 for a purchase price of $357 million. There's a lot to be excited about with Clearwave. It is a great geographical fit, providing service to markets that are both similar and in close proximity to the existing Cable ONE footprint.

It is a pure fiber provider of services to business and enterprise customers with 100% owned and underground network, and it is growing rapidly with tremendous opportunity for both penetration gains and network expansion. We are very impressed with Clearwave associates at all levels of the organization and are excited to leverage their strengths across the entire Cable ONE platform as we look to continue to deliver industry leading business services revenue growth. Lastly, we mentioned on our third quarter call that we have been exploring a transition to a new brand strategy that better reflects who we are and what we stand for: a company committed to providing our communities with connectivity that enriches their world.

In December, we announced that we will be transitioning to our new brand, Sparklight. This change reflects Cable ONE's transformation from our origins as a traditional cable company to a full service provider that seamlessly connects customers to the things they care about, including family, work, entertainment and their community. The name Sparklight illustrates the speed and connectivity we're known for, while at the same time, symbolizing our new brand promise, connecting people to what matters. We are in the planning and execution phase now and will begin this transition starting midsummer and continue throughout the second half of the year for Cable ONE and into 2020 for NewWave. We expect that we will incur an additional $9 million to $11 million of expenses over the next 2 years related to the rebranding, inclusive of the costs for changing over to NewWave systems, which was part of our original integration plan. We believe this will create long-term positive benefits for both our associates and customers.

And now Steven will provide more financial details on our fourth quarter and full year results.

Thank you, Julie. The fourth quarter of 2018 was a nice exclamation mark on a fantastic year as it relates to our financial performance. Revenue for the fourth quarter 2018 were $269.9 million compared to $257.7 million in the prior year quarter, representing a 4.7% increase. This increase was fueled by residential HSD revenue increase of 12.3% and a business services revenues increase of 10.3%.

Net income in the fourth quarter was $42 million, which was a sequential 9.6% increase from the third quarter. Net income per share on a fully diluted basis rose from $6.70 to $7.34 sequentially. While fourth quarter 2017 net income was $144.3 million, there isn't much utility in the comparison because of the favorable impact of the 2017 federal tax reform legislation.

Operating expenses were $91.8 million on -- or 34% of revenues in the fourth quarter compared to $92 million or 35.7% of revenues in the prior year quarter. Selling, general and administrative expenses were $57.6 million or 21.4% of revenues and $55.2 million or 21.4% of revenues for the fourth quarter of 2018 and 2017, respectively. The slight increase in SG&A was primarily attributed to billing system migration and acquisition-related costs incurred during the quarter.

Adjusted EBITDA was $127.6 million for the fourth quarter of 2018 and increased 8.8% from $117.3 million in the prior year quarter. Our margin increased 180 basis points going from 45.5% in the prior year to 47.3%.

Capital expenditures totaled $58.6 million or -- and $50.5 million for the fourth quarter of 2018 and 2017. Year-to-date, we have spent $217.8 million or 20.3% of revenues, but 18.9% when excluding the incremental capital expenditures related to the NewWave integration. Additionally, as we indicated on our last call, we were more internally focused on our capital expenditures as a percentage of adjusted EBITDA, which was 43.5% in 2018.

In the fourth quarter of 2018, we purchased 4,786 shares for $4 million at an average cost of $841.40 per share. In 2018, we've purchased a total of 38,814 shares for $26.6 million or $684.89 per share on average.

From a liquidity standpoint, we had approximately $264 million of cash on hand at year-end versus $162 million at December 31, 2017. We continue to generate significant free cash flow, and at year-end, our debt balance was approximately $1.2 billion, which included $730 million of term loan borrowings and $450 million of notes. In January 2019, we borrowed $250 million of term loans to finance in part the Clearwave acquisition.

Overall, our debt to adjusted EBITDA after netting cash on hand against debt was at 1.8x, providing us with significant liquidity. We also had approximately $196 million available for borrowing under our revolving credit facility as of year-end.

We were pleased with our fourth quarter financial results, in particular, our growth of residential HSD and business services. Our core strategy continues to deliver steady adjusted EBITDA growth and margin expansion, and we feel good about our ability to continue that in 2019.

Operator -- or Danielle, we're now ready for questions.

(Operator Instructions) The first question comes from Philip Cusick of JPMorgan.

So you had talked earlier in the quarter about pulling back on marketing in the fourth quarter, and yet you put up your best video results since the first quarter 2012. What do you think was the driver of that?

Philip, it's Julie. So we spent, if you recall, a large amount, probably the largest I've seen our company spend, in the third quarter and so I think probably spillover from that is part of it. I think our decision to move our pricing and packaging launch up to the beginning of January, the results from that testing, that was probably part of it as well. We started with just a few systems, and then we added in a few more systems to see if the results would hold with varying geographies, and they did. And we pushed the rollout for early January and the video rate adjustment back. So my guess is that's part of it. I think what you've been hearing in the industry, too, is that competitive pressure might be easing -- might have eased a bit in the fourth quarter as well.

That's great. And then second, can you talk about the impact of going after -- I think you called it an unpenetrated customer segment. Are you seeing that drive some of the success as well?

I missed the first part of your question, Phil.

I'm sorry. I think you talked as well about going after some unpenetrated customer segments. Has that had a material impact on the pace of business as well?

My reaction is that it has not. We have been going after different segments, but the response rate has not been large there. We are stepping up now in 2019, the marketing to that group even broader. What we have seen is it does drive people to contact us, either by phone or by web. But rather than picking up the service that we are marketing, they are going to our flagship product.

The next question comes from Zack Silver of B. Riley FBR.

Okay, great. Number one, I was wondering if you could help us in any way size the financial impact of Clearwave this year.

No, not yet, Zack. I think, in short, I appreciate the effort. And I think we would definitely talk to you and others about this at the time of the deal. I mean, clearly, the reason we're disclosing the price now is because it was a subsequent footnote in our financial statements. We continue to want to be active in M&A and continue not to want to give anyone we're competing with any more information than we have to. And so to the extent something is material, we'll always disclose it. To the extent that we don't have to disclose, we're probably not going to disclose anything more than we have to. But we are very excited about the impact it will have this year, but probably much more excited about the impact this is going to have on Cable ONE in total over the long period.

Okay, great. That -- I think that's helpful. In terms of the pricing changes, you guys have introduced this unlimited plan, which I think is $40 incremental a month. And I was just wondering if you could kind of speak to what the early take rates are for that and how you see that developing as we move forward.

Yes. I think, Zack, that given that pricing has been out in the market less than 2 months now, this is probably a great topic that is more suited to next quarter's call in order for answers to be more fulsome. But really, we'll be happy to share the variety of indicators that we're seeing and that being one of them.

Okay. And then, I guess, one more quick one. The sequential loss, I think there was a sequential loss in business customers. If you could just kind of talk to what drove that in the fourth quarter.

Yes, that was really a -- as part of the billing conversion, there was a piece that flipped around. That's just how customers came over from what they were classified as NewWave to how they came into the Cable ONE system.

Yes, totally a translation.

The next question comes from Frank Louthan of Raymond James.

Maybe one other roundabout question on Clearwave. Can you give us an idea of how it might impact CapEx in the year? And then just to clarify, you're not raising pricing this year. Is that what you said?

Want to take Clearwave first?

Sure, I'll take Clearwave first. So I think similarly, we're not going to give any details on that yet. I mean, we haven't -- I guess what I would say is, historical, what we've said about CapEx, we think it will continue to be in line with what we've said historically. And we're not changing our perspective on what CapEx will be kind of in a percentage of revenue -- as a percentage of revenue the way we've talked about it historically.

And related to not raising pricing, well, we took a video rate adjustment throughout the month of February across multiple cycles, but there has not been an increase in HSD. I think we've taken 1 in the past 6 or 7 years. I think that our promise is to connect our community neighbors to what matters to them. And if our pricing and packaging can monetize our costs, both operating and capital, in order to keep our standard service unadjusted, I think we've created a win-win that most companies and customers would all hope for.

And Frank, let me just circle back on that as well because one thing, and it's in our 10-K, there is going to be the first year integration-related CapEx that will be tied to this. And so in our 10-K, we disclosed that there'll be up to $35 million that will be spent between the NewWave and the Clearwave integration-related piece. I think what we probably won't talk about yet, though, is like specifically what either the kind of recurring CapEx is or even probably more importantly, opportunities we have to expand our network and how much we'll choose to invest there going forward.

And can you comment on how -- what's sort of the SG&A lift you expect after the billing conversion?

SG&A. So I think what we can say is that the original synergies that we've projected to attain as part of the NewWave transaction, by the end of the year, we will be on that run rate of that realization. It won't be for the full year because some of them come in throughout the year, whether it's provisioning or other related synergies that we'll realize. But by the time we get to the fourth quarter, the fourth quarter run rate will fully reflect the synergies that were originally promised when we closed on the deal in 2017.

The next question comes from Craig Moffett of MoffettNathanson.

Two if I might. First, can you talk about the -- your view on the value of bundling video and broadband. There's sort of a raging debate in the industry about how much broadband churn rate depends on the video bundle. And I wonder if you think it's been part of the reason your broadband growth and penetration has been a bit slower than your peers. And then second, Steve, you mentioned pointedly in your remarks about liquidity. So I'm wondering if you can just update us on your thinking about do you see more M&A opportunities in the future.

Okay, Craig, I'll take the first. Perhaps only leave the second for Steven. I think we've talked about this in the past. We don't see bundling as the savior for churn. Our churn is low, and it's going lower. That trend continues, and over 70% of our customers are not bundled. They're HSD only. We've seen many experiments in markets where people have lost broadcasters for example. And their video loss was double or triple the rest of the MSO, but their HSD rates were the same as the MSO, suggesting that there is a decoupling between the 2 different products. I also think that our growth rate on a penetration very uniquely ours, based on our strategy, which is LTV focused, and again, we tend to try to focus on counting our cash flows and not our subs.

So on the M&A side, I think, clearly, we continue to want to use our balance sheet to grow. We want to create long-term value, and we'll look at -- we'll look for opportunities for strategic fits and heavily focused on business that is providing HSD service, either residentially or commercially in more rural-type markets. And with Clearwave, there is a lot less integration-related activity, so our ability to think about a transaction and be able to think about buying it and integrating it and doing all those things is probably a much shorter time frame than what it was when we bought NewWave and we had a period of time that we needed to absorb that. So yes, I think we continue to want to look at opportunities that present themselves.

The next question comes from Stephan Bisson of Wolfe Research.

A couple of questions. First, the HSD overage charges, I know that it's $40 for the unlimited. If you don't take the unlimited and you go over, what is the pricing like?

Hey, Stephan. So if you don't take the unlimited package, you have your data plan that I outlined depending on what service that you take. So let's pretend you're taking our $55 service for 100 MB down. You get 300 GB data plan. Under our new pricing and packaging scenario, if you go over, you will pay for buckets of gigs, 100 GB for $10. It will not go over 4 or 5x. So the value proposition is, if you're someone who uses a lot of data, then you would more than likely self-select into a higher tier plan or grab the $40 unlimited. But we give customers all the tools they need and notifications so that they can accurately pick what makes sense for them.

Okay. And can you talk about average usage and how that's kind of grown recently in terms of...

Yes, so our average is hanging around just the same as the industry, around 2 60, 2 70 and we're growing exactly the same as the industry, too, anywhere from -- depending on when I a look at it, it could be 23% up to 30% on an annual basis.

Great. And then lastly, just a little bit more on CapEx. I believe you guys said $35 million over the prior commentary, and I think the prior commentary was in the high teens, but trending lower. Is that still the way we should think about it?

No, so I think there's 2 comments there. The $25 million going to $35 million is talking about $25 million. The number that had previously been talked about, about NewWave was that there was going to be a $10 million, $25 million, $25 million. What we're saying is that they'll be up to $35 million inclusive of both the NewWave piece and Clearwave piece in 2019, so that it has less to do with. And the other thing we talked about is high teens, high teens, excluding the integration-related CapEx and so yes, still continuing to be in the high teens, excluding the integrated-related CapEx.

The next question comes from Brandon Nispel of KeyBanc Capital.

A question for you, Julie. Julie, do you spend time thinking about how you can really accelerate the transition away from video and towards more of your data-centric businesses, I guess, particularly as you think about the competitive intensity of some of these OTT services picking up longer term? And then maybe for Steven, can you help us understand the financial implications if you are to see another acceleration in video subscriber losses?

So I think what you asked was something to the effect of how much time do I spend thinking about accelerating away from video to data service, which...

Can you help us understand your thoughts around it? I understand that you probably do think quite a bit about it. But can you help us understand whether there are things you can do to sort of push the industry more towards your model or push your customer base further along into the data business?

So as far as pushing the industry towards our model, I think there are probably 5 to 10 paths to get to greatness, and our path isn't the same as others. Our markets aren't the same as others. Our strategy is not the same as others. And actually, I don't think that we do put a lot of time and effort. Well, I know we don't put time and resources into pretty much anything having to do with video because of what it nets us and our shareholders in the long run. We pivoted to a data-centric model over 5, 6 years ago. And we see nothing to derail us from that path. That being said, we're not trying to drive our video customers away. We understand that people want to be informed and educated and entertained by video. They just have a lot more choices these days. And so we see our role as educating our consumers as to the best choice for them. That might be our linear video product. It might be an OTT product, and we're happy to have them go to Hulu or Netflix or Sling TV, and we also reinforce with them that they need a reliable, high-speed, robust internet service like we provide. And it's not just me saying that. It's J.D. Power in the west saying that too.

Yes. And so on the financial implications, I think there's 2 things. There's one, adding on to Julie's comment, that ties to financials, which is -- the biggest thing we have to think about with video is how do we continue to recoup more bandwidth to offer HSD services. And so there's video-related implications to that. As you think about how the service is delivered and what you might do to make sure that we continue to have a robust network as usage continues to grow, that we're able to meet customers' needs. And we spend a lot of time thinking about that. But as it relates to the financial implications of the pace at which customers leave us, I think that if next year we lost 10% or 20% customers, there's probably no real difference in the ultimate financials. If we went from 10% to 100% overnight, then there are some implications because there is a phasing that has to happen on the workforce side of the business that through attrition over time allows you to meet that. And so that is really the only financial issue, is making sure that the gradual business that goes down is replaced with HSD business and business services that's going up. And so that's probably the biggest thing we think about, is how to make sure we phase it appropriately.

Got it. And if I can just follow up real quickly. You guys used to have a disclosure in Ks and Qs on programming expenses being between 50% to 60% of video revenues. And I'm wondering if that is still the case or if it's outside of those bounds at this point.

I would say it is slightly out of sight -- those bounds now because as we continue to -- and basically, all we do on video is we pass through what we get as a rate increase. And so your percentage margin goes down over time, as all you do is pass the dollar through. So you maintain dollar margin, but you don't maintain percentage margin. And so because of that, we're moving to the high end of that.

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

Thank you, Danielle. Before we sign off, I want to mention that we will be presenting at the Raymond James Conference on March 5 in Orlando, Florida. I hope we will see some of you there, and we look forward to speaking with you again in a few months. Thanks again for joining us today.

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