Cable One Inc (CABO) 2019 Q3 法說會逐字稿

Good day, and welcome to the Cable One Earnings Report Q3 2019 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Steven Cochran. Please go ahead.

Thank you, Sara. Good afternoon and welcome to Cable One's Third Quarter 2019 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 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 the 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 thank you for joining us for our third quarter 2019 earnings call. Before getting into our results, I want to welcome our more than 400 new associates who join us from Fidelity. I will talk more about the acquisition a little later, but we are extremely excited to have them as part of the Cable One team. I'd also like to take a moment to welcome Kris Miller, the newest member of our Board of Directors. Kris is a valuable addition who will provide unique insight and experience to our already exceptional Board. I'll begin by giving some highlights from the quarter and then talk about a couple of the important events that happened shortly after the quarter end, before handing the call over to Steven for a full recap of our financial performance.

We are pleased to have once again delivered a quarter of strong performance, including year-over-year increases in total revenues of 6.2% and adjusted EBITDA of 14.1%. Our adjusted EBITDA margins increased 340 basis points year-over-year to 49.1% for the quarter. These results illustrates that our business strategy continues to consistently deliver both top line and adjusted EBITDA growth as well as expanding margins.

Speaking of growth, we experienced a 3.5% residential HSD unit increase and our residential HSD ARPU was up 4.7% year-over-year, resulting in an 8.2% increase in residential HSD revenues. Revenues from business services were up 28% year-over-year or 10.3% excluding the impact of Clearwave.

As you might recall, last year, we accelerated marketing spend in the third quarter in advance of our NewWave billing system conversion. So we expected to have a tough comparison from a net add standpoint. Given that challenge, we are especially pleased with our performance relative to last year.

Meanwhile, our business services Group launched an enterprise Wi-Fi service, which offers an agile Wi-Fi solution with a cloud-based customer portal and user app, enabling enterprise businesses to configure, manage and monitor their Wi-Fi network and user activity from anywhere at any time. On the SMB side, we launched HFC gigabit service that provides greater connectivity and faster speed to meet the growing needs of those sized businesses. Our business team is also proceeding with the CRM update that I talked about earlier in the year, which we expect will help us improve efficiencies, including a reduction of approximately 30,000 manual touch points annually.

As I mentioned during our last call, we are nearing the end of our NewWave integration efforts. Our team has done a remarkable job during integration, and we recently completed two more important initiatives. First, activating usage-based billing after several months of monitoring and educating and testing. This will grow NewWave HSD ARPU contribution as we move into the fourth quarter.

Second, the team revamped NewWave's video programming line ups to match legacy Cable One following the September 30 expiration of NewWave's contract with Viacom. The team executed the channel changes and handled customer communications and the related call volume in a very effective and customer-friendly manner.

Our rebrand of Sparklight is also progressing well as we approach completion of our legacy Cable One markets. We've seen positive consumer sentiment, based on our most recent research as 73% of those consumers in those markets say they understand that Cable One is the same company as Sparklight.

When surveyed, these consumers noted they feel positively about the new Sparklight brand and perceived the brand as one that provides the latest internet technology. We appreciate the hard-working commitment of all of our associates over the past year in making our rebrand a success, and we look forward to completing our rebrand of NewWave's markets in 2020.

We invested a great deal of time and effort in Q3 planning to close the Fidelity acquisition. We appreciate Fidelity's ownership group who worked diligently with us over the past several months, which allowed us to be well prepared to bring Fidelity into the fold.

In addition to numerous visits to various markets over the last 6 months, our leadership team was able to spread out and visit each Fidelity market on October 1, the day we closed the transaction. With this cooperation, we were able to accomplish some Day 1 achievements such as moving all Fidelity associates onto our HRIS system immediately. This type of execution is encouraging, and we believe we are off to a great start.

And now Steven will provide more details on our third quarter results.

Thanks, Julie. The third quarter of 2019 once again produced strong financial results. Revenues for the third quarter were $285 million compared to $268.3 million in the prior year quarter, representing a 6.2% increase. As Julie mentioned, the increase was fueled by a residential HSD revenue increase of 8.2% and the business services revenue increase of 28%. Excluding Clearwave operations, total revenues increased 3.6% year-over-year.

Net income in the third quarter was $49.8 million. Net income per share on a fully diluted basis was $8.68 per share.

Operating expenses were $94.9 million or 33.3% of revenues in the third quarter compared to $92 million or 34.3% of revenues in the prior year quarter, a 100 basis point improvement.

Selling, general and administrative expenses were $58.9 million or 20.7% of revenues in the third quarter compared to $59.4 million or 22.2% of revenues in the prior year quarter, 150 basis point improvement.

Adjusted EBITDA was $140 million for the third quarter and increased 14.1% from $122.7 million in the prior year quarter. Or -- Our adjusted EBITDA margin increased 340 basis points year-over-year going from 45.7% to 49.1%.

Capital expenditures totaled $65.8 million and $68.3 million for the third quarter of 2019 and 2018, respectively. Included in the current quarter were $6 million of capital expenditures related to Clearwave operations. Year-to-date, capital expenditures as a percentage of adjusted EBITDA and revenues were 42.9% and 20.8%, respectively, in line with our expectations.

In the third quarter of 2019, we paid $12.8 million in dividends to shareholders. From a liquidity standpoint, we had approximately $146 million of cash on hand as of September 30, and we continue to generate significant free cash flow. At quarter end, our debt balance was approximately $1.3 billion consisting of term-loan borrowings. Overall, our debt to last quarter annualized adjusted EBITDA after netting cash-on-hand against debt was at 2.1x, providing us with ample liquidity.

We also had $343.3 million available for borrowing under our revolving credit facility as of quarter end.

On October 1, we drew the full amount of the $450 million Delayed Draw Term Loan A established in the second quarter and used the proceeds together with the cash-on-hand to fund the Fidelity acquisition, which also closed on October 1.

The purchase price was $525.9 million in cash subject to customary adjustments. We anticipate spending up to $40 million in incremental capital over the next 3 years in order to integrate and standardize the network as previously disclosed. We expect to realize approximately $15 million in estimated run rate cost synergies within the next 3 years.

Earlier today, we filed an investor presentation with the SEC, which is also posted on our IR site and give some of the key financial and operating statistics for the acquired Fidelity operations.

Similar to Clearwave, we do not expect to separately report on Fidelity results going forward. After giving effect to the transaction and including Fidelity's 2019 year-to-date annualized adjusted EBITDA of approximately $47 million, the net-debt-to-adjusted-EBITDA leverage ratio at the end of the third quarter would have been 2.8x with a total debt balance of approximately $1.8 billion and a cash balance of approximately $66 million. We are pleased with another strong quarter and excited about the opportunities that Fidelity provides as we work to integrate their operations into our own.

Sara, we're now ready for questions.

(Operator Instructions) Our first question comes from Philip Cusick with JPMorgan.

I guess to start, let's talk about the rebranding cost, there seems to be a lot of questions on that. The $3 million pulled out, was that incremental to your typical run rate of marketing?

Yes. It was, Phil. We originally said that we would spend between $9 million and $11 million on the rebrand for legacy Cable One and NewWave, and we've spent about 60% of that so far, right on schedule.

And you said you'll finish that spending in early 2020?

In 2020.

Okay. And then in terms of the spending, I'm surprised that -- given that you were spending a lot of money in marketing a year ago and that drove the 3Q sub numbers in '18, that the rebranding spend didn't have any impact on 3Q subs this quarter. How should we think about that?

Well, the rebranding is about brand, not acquisition. So it is spending money on things everywhere from office redesigns to uniforms to on-air getting people do understand that Cable One is now Sparklight. And what does Sparklight mean. And that's across all of our lines of business from broadband to business services where it really, I think, makes a big impact and advertising sales as well.

Phil, I thought your question was going to be, "Boy, you spent a lot less in marketing this year and you added the same number of customers, that's really impressive".

So I mean that's not really a question.

Yes. That was definitely my question.

Okay.

Well, okay. Last one on this topic and then I'll let you go. But when we pull that out, the margin, the growth, sequentially, was really strong. So is this a good run rate, sort of, jumping off period going forward? Or is there anything else going on that would make this abnormal?

No. I think what we would say is we have continued to see margins expand as we have continued to execute on the business strategy, and we expect that to continue. There's always one-off in any given quarter and timing of things. So for instance in the first quarter, when programming rate increase happen before you do your rate adjustments for customers, those things impact margins. So there is always timing, but as we think about the long term which is the way we look at it, we see margins continuing to increase over time, and this is reflective of that.

For acquisitions.

Yes. For acquisitions, which will bring something in that -- and Fidelity has lower margins and that will impact as we continue to migrate them towards our business model.

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

On the NewWave usage-based billing front, so rolling that out this quarter. I guess how should we think about the ARPU trajectory based on the rollout of that? I mean is there going to be, sort of, a sharp acceleration there? Or is it going to be more muted? And more like the trend that we've seen?

Zach, it's Julie. I think what we'll see -- and it did just rollout at the very last week of the quarter. So we're going to start seeing the results throughout the fourth quarter, is exactly what we've said. We're going to continue to move NewWave to look like Cable One. So you would expect to see their ARPUs, which have been steadily getting closer to ours, to become more so.

Okay. And then more high-level one. Just as we continue to get, sort of, fixed and wireless industry convergence, I'm wondering if we can get your updated thoughts around how you sort of view your ability to bundle wireless and your offerings through an MVNO relationship like Charter and Comcast and Altice are doing.

Well, my first thought is I'm not sure if I want to comment about it at all. I don't think that the MVNO model right now is something that we find a large interest in giving the margins and the amount of work and growth and opportunities that we have with our existing business right now. But we are always leaning into and learning from others and, I guess, we'll see.

That makes sense. And then the last one for me.

Just on the Unlimited plan penetration, any update you can give on that? How is that trending? Accelerating? Deaccelerating? A hard number would be great.

Yes. Well -- so I'll -- the number I'll give you is still over 10%. It is slightly accelerating. I think the interesting thing that I took note of is that the higher speed that a consumer takes, the higher the percentage of unlimited sell-in. So that is to say if you take our gig service, the percentage of customers that take unlimited there is the highest of any consumer group. So just an interesting fact for you.

Our next question comes from Stephan Bisson with Wolfe Research.

So with Fidelity closed, this is, I think, the first time in a while you haven't had something pending. Can you update us on your use of cash? And how many more Fidelitys you might see out there, if you were to find attractive acquisitions?

Sure. I think we would say that we're always out looking trying to find what's next. Definitely, we didn't spend a lot of time this summer necessarily looking at that because we were 100% focused on the integration process. I think we are further along on this one than we would've been on, say where NewWave was, one because of the size of the NewWave relative to Cable One at the time. And then the size of the Fidelity relatively to what Cable One is today. And so the fact that we get, kind of, a jump start on this one combined with that allowed us to probably be in position to move more quickly than we did last time. But -- so we will be looking but we really just started that process again.

Okay. And if something doesn't jump off the screen at you right away, any update on the capital return policy, dividend, share repurchases?

Yes. I think our capital policy is pretty set, which is we're opportunistic whenever it comes to share repurchases, and we plan to have a very [predictive] dividend. And so I think, I would tell you that we value the flexibility of our balance sheet and the opportunity -- knowing the amount of the opportunities that are out there, we value the flexibility of our balance sheet more than just trying to maximize the perfect level of leverage at this point.

Understood. And then, I guess, lastly, the system conversion cost. Can you remind us how much longer those should be in there and the potential dollar amount?

Yes. So I think what the run rate you see is probably going to be consistent through the middle of next year. And that's [limited].

Yes, go ahead.

The next question comes from Craig E. Moffett with 2004 (sic) [MoffettNathanson LLC].

I'll just stay with this question of acquisitions for a second, Steve. How do you think about your capacity to do acquisitions now that having had some success with a string of them, what kind of size and frequency do you think you can bite off? Assuming you can find the targets who are willing to take the currency? How -- just operationally, what kind of pace do you think you'd be able to maintain?

Well, I think, one, the first -- the part to -- the question you asked just as part of yours, is the most relative part is what becomes available and when. I think we will have an increasing capacity to be able to do more just because we get bigger and the deal sizes become less of the total company, and we get better at it all the time because of what we're learning. So I think from that standpoint, our pace should be able to increase assuming there's opportunities that present themselves. A lot of these things are not in our control, based on where private equities or families or other things decide to do. That doesn't mean we won't be pounding the payment to try and find the next right thing for Cable One.

And so yes. It's -- we feel like it's an important part of what we do. Our base business is our base business, and we're operators at the core. And I think, we are -- we're very successful in the execution side of that and so they thought of being able to go and bring more into that and continue to execute what we really like.

So we definitely look at this as incremental, not the business plan. The business plan is what we execute on every day.

And is there a sense that you could do something larger at this point? Having done relatively smaller ones at this point, is there a sense that you've now proven the model to be able to do a deal that -- with larger size acquisitions?

I think it's probably more about looking at each and every deal and figuring out how it fits into our company. Part of the beauty of what we've done is they've been a nice size fit to where we can take it, and we can apply what we do and it doesn't get in -- it doesn't interrupt running the business day to day. And so could we, we definitely have the debt capacity, we have those kind of things. But I think it will always be an organizational conversion to figure out where does this stand and how does it fit into our 10-year plan? Not what's it going to do for the next quarter.

Our next question comes from Frank Louthan with Raymond James.

Just wanted to touch base on some of your lower priced broadband products. What's the current take rate with those? And how are you feeling about marking those? And then just curious on the various platforms you've got native on your set-top boxes. Are you promoting or pushing any streaming services, like Netflix, [so forth,] that you have on there. Are you considering adding any others?

Frank, it's Julie. Our lowest-priced broadband service has very low levels of take rates, very low levels. We do market it but what we find is when people call in the price of the next level package up for the value and what you get seems to draw people into that next level, to the starter package, which is a 100-meg package. So the take rate, even though we market it, tends to be very low. In terms of marketing platforms on our set-top boxes, we don't really spend any money marketing video. But having said that, we have worked with training our people to be served like a concierge service. So if a customer calls in, and they are maybe frustrated with the cost of video service or if they are looking for particular thing, we will talk to them about what they like to watch, and we will suggest OTT platforms for them.

In fact, if you go into our office in Sioux City, for example, you might see several of them advertised in the lobby and that is so that a conversation can be had with our associates, helping direct them to the video service that works best for them and it doesn't have to be ours.

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

Julie, question for you. What are the steps that you need to take to make Fidelity look like legacy Cable One? And how long do you think that will take? And then maybe, if you could talk about the customer growth rates from Fidelity, that would be great.

And then 1 for Steven. You mentioned synergies from NewWave programming, I was wondering if you could talk more about that, maybe a dollar amount. And then Fidelity synergies, what are immediate? And what do you have to wait for?

For Fidelity, if you take a look at the deck that was posted, we're talking about an integration time period of approximately 3 years. And fidelity is a fantastic acquisition for us. We will do the very similar things that we did with NewWave. We will be working on integrating their network with ours. We'll be spending time with them to learn best practices from them and coming up with a new CABO way of doing things.

We will work on having their revenues and ARPUs match ours, their margins match ours, their costs match ours and all those will take about 3 years. In terms of their customer growth rate, I don't think that's a place I'm going to go right now. Thanks.

Yes. So -- and your questions to me, Brandon, on the synergies. We're not going to give specifics on the programming realignment savings that came from that, other than to say that it fell within what we had originally guided towards the total amount of synergies, and that we feel very comfortable that this is kind of the last piece of that -- that we more than realized what we said we were going to.

And as it relates to the Fidelity timing, it's one that really, kind of, spread over the 3 years. There's a handful that come to us from combination of the most senior executives moving on and -- savings that come from that. And their own programming realignment that took place right after close. So there is a decent amount that happened. And things that we will be able to roll on to contracts of ours whether it's from a bandwidth standpoint or insurance or all of those kinds of system related. And then over time, the rest of it as it starts -- as we start to make changes basically taking the best practices of whatever we do and what they do and move the company forward from there. I would say they may not all come in reasonably even over the 3 years with a decent kick start right off the bat with some of the initial savings that happened right at the beginning of October.

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

Thank you, Sara. I want to thank all of our associates for another great quarter. We appreciate everyone joining us for today's call and look forward to speaking with you again in 2020. Thank you.

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