Cable One Inc (CABO) 2022 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for attending today's Cable One's, Second Quarter 2022 Earnings Call. My name is Tia, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to your host Jordan Morkert with Cable One. Please go ahead, sir.

Thank you, Tia. Good afternoon, and welcome to Cable One's, Second Quarter 2022 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I would like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call in today's earnings release and in our recent SEC filings. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. .

Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. Generally Accepted Accounting Principles or GAAP. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net.

Joining me on today's call is our President and CEO, Julie Laulis; and Todd Koetje, our CFO. With that, let me turn the call over to Julie.

Hi, Jordan, and good afternoon, everyone. We appreciate you joining us for today's call. I'm going to ask for a little bit of grace as I tested positive for COVID on Tuesday. I am isolating and feel okay, but if I end up coughing, I apologize.

Our second quarter of 2022 results reflects continued broadband customer and revenue growth at a more seasonally adjusted pre-pandemic levels, and we continue to generate industry-leading margins. Compared to the second quarter of '21, total revenue increased 6.8% adjusted EBITDA increased 6.7% and adjusted EBITDA margin was 53%. Any customer growth in the second quarter, which is traditionally the toughest quarter of the year, is reason for confidence in the long-term fundamentals of our business.

While we experienced some challenges in the execution of certain pricing and packaging adjustments within the quarter that affected our residential ARPU, we have [certain] other factors that enhance our confidence despite the macroeconomic environment we find ourselves in.

Looking first at our residential Internet service, approximately 41,000 customers on a year-over-year basis for 4.4% growth. On a sequential quarterly basis, we grew by 1,300 customers. As we've previously discussed, these numbers represent a more normalized pre-pandemic seasonality and our customers in the second quarter was in line with the comparable quarter during 2019.

We believe that we are and will continue to grow off the peak achieved during the height of the pandemic, and we have already realized continued modest growth so far through the month of July. We anticipate our business will continue to demonstrate resilience due to the growing need for reliable Internet service in the markets we serve.

Our residential Internet ARPU for the second quarter increased by 2.7% year-over-year. Our ARPUs can and should be (technical difficulty) as a reminder, we have not implemented any rate adjustments since fall of 2015, nearly 7 years ago. In late first quarter, we migrated about 15% of our residential Internet customer base from 100 to 200 meg with an initial increase of $5.

In hindsight, this approach along with some offsetting adjustments related to seasonally low levels of customer data usage, increased promotional campaigns and small onetime accounting changes made to align the ARPU methodology of our acquired brands, all resulted in ARPU growth that did not [meet] our expectations. That said, we expect usage will grow seasonally throughout the second half of the year, and we see positive impact in ARPU as the promotions roll off.

Add to that an acceleration in our (technical difficulty) higher tiers than we but if we can move this lever as customers demonstrate the type or higher speeds and data. For context, our gigabit service selling nearly doubled sequentially from 16% to 28% in the second quarter.

Moving to Business Services. We saw revenue growth of 7.8% over year an acceleration from the first quarter when excluding CableAmerica and the operations contributed to Clearwave Fiber. From small business to enterprise customers, [company] leads the way with broadband customers and ARPU showing continued durable organic growth. And with our deep commitment to address [total] equity across our footprint, we continue to seek opportunities to partner with government and local entities to provide connectivity in rural communities.

Most recently, our team received a grant to provide (technical difficulty) for service in the Eastern Arizona region of Heber-Overgaard. Extending broadband service to areas previously unserved and underserved will remain a key (technical difficulty) because we understand how critical fast and reliable Internet is to the economic development of small cities and large towns.

As mentioned earlier, another indicator of our long-term growth potential is reflected in our network usage. Although average data usage increased year-over-year by approximately 16%, our downstream and upstream utilization during peak hours never [exceeded] 22%. With nearly $1 billion in capital investments in our network over the last years, Cable One and has and will continue to deliver a reliable, premium customers across our family of brands.

Looking at our unconsolidated investments, in total, residential and business data customers grew by approximately 9,100 customers or 2.2% on a sequential basis from quarter 1 of 2022. This investment strategy, which we initiated back in 2019 with our small investment in Hargray, has become an important element of our long-term capital allocation philosophy. And affords Cable One with the opportunity to align with entrusted management teams and financial firms in the communications sector. Through these partners, we were able to successfully accelerate our collective ambition of being the most trusted providers of solutions to small cities and large towns across America.

This quarter, we are excited to announce our most recent strategic growth capital investments, in Visionary Broadband, a leading fiber-based broadband provider, serving rural communities across Wyoming, Colorado and Montana. Todd will provide more detail about our partnership with Visionary and other small transactions that were closed during the quarter in his remarks.

Transitioning to integration activity, the team continues to execute multiple integration and de-consolidation programs, maintaining focus on speed to realizing synergies and while continuing to deliver on our commitment to our associates, customers and communities. While there will be near-term integration costs, we are confident in the long-term value these new brands will create.

Despite the quarter that didn't live up to our expectations, I am confident about our future. Our strategic positioning over the past decade, which includes our data centric strategy and rural markets where we choose to operate with the relentless execution of our (inaudible) continues to have a meaningful impact on our business as well as the lives of the customers and communities we serve.

Before handing the call over to Todd, I'd like to share a few items from the quarter that we are exceptionally [proud of]. The first is our recent donation of nearly 600 Chromebooks to 11 Title I schools across our footprint. Now in its ninth year, our Chromebooks for Kids initiative began simply as a way to augment technological resources to schools that's (technical difficulty) -- funding in our communities.

Over the past several years, however, access to technology in schools has moved from being a luxury to absolute necessity. And our goal is to help bridge the digital [divide] in schools that may not have just the funding to support this effort. We think we have donated nearly 3,000 Chromebooks to schools in need.

As another example of supporting the communities where we live and work, we are pleased to have recently been named by Cablefax as the Corporate Social Responsibility Operator of the Year for our commitment to advancing education, strengthening communities and improving lives across our 24 state footprint.

Among the efforts highlighted in this recognition was our Charitable Giving Fund, which annually awards $250,000 in grants across our footprint, concentrating support in the areas of education and digital literacy, hunger relief and community development.

Other efforts included the Chromebooks for Kids initiative, I mentioned previously, Our partnership with the Arbor Day Foundation and Keep America Beautiful and last but not least, the thousands of hours our associates spend each year volunteering their time and talent with nonprofit organizations in our community.

Our associates' unwavering commitment to our customers and their passion for giving back to the communities we live in and serve, created a unique culture that continues to flourish even in times of growth and change.

And now welcome Todd, to position effective July 1 (technical difficulty) provide a full recap of our financial performance.

Thanks, Julie. I'm excited to be here with you all today. Before I begin, I'd like to remind everyone that our second quarter 2022 results do not include operations contributed to Clearwave Fiber at the beginning of this year, and the results for the second quarter of 2021 included just 2 months of Hargray operations and did not yet include CableAmerica operations.

Starting now with revenue. Total revenues for the second quarter of 2022 were $429.1 million compared to $401.7 million in the second quarter of 2021, a 6.8% increase. This was fueled by a 12.4% growth in residential Internet revenue. When excluding Hargray and CableAmerica as well as the impact of the Clearwave Fiber deconsolidation, residential Internet revenue growth was 6.4% and business services revenue growth was 7.8% on a year-over-year basis.

While the deconsolidation of Clearwave Fiber was predominantly business services revenue, our remaining residential Internet and business services operations still comprise over 72% of our total revenues. Operating expenses were $118.4 million or 27.6% of revenues in the second quarter of 2022 compared to $112.4 million or 28% of revenues in the comparable quarter of the prior year.

Selling, general and administrative expenses were $90.8 million for the second quarter of 2022 compared to $88 million in the prior year quarter. These expenses were 21.2% of revenues in the second quarter of 2022 compared to 21.9% of revenues in Q2 2021. A 70 basis point improvement. Net income in the second quarter was $69.2 million or $11.11 per share on a fully diluted basis.

Adjusted EBITDA was $227.5 million for the second quarter, an increase of 6.7% when compared to 2021. Our adjusted EBITDA margin was 53%. Please note that we do not provide adjusted EBITDA growth rates that exclude the impact of the Hargray and CableAmerica acquisitions and the Clearwave Fiber deconsolidation. This is due to the challenges in providing the required non-GAAP reconciliations when taking into account corporate allocations that were a part of Hargray's financial statements in 2021.

Capital expenditures totaled $107.3 million for the second quarter of 2022, which equates to 47.2% of adjusted EBITDA. During the quarter, we invested $11 million of CapEx for network expansion and $6.5 million for integration activities. By continuing to leverage our scale and long-term vendor relationships, we had the opportunity to bring forward approximately $9 million of incremental fiber and related broadband equipment purchases to support our ongoing growth initiatives. While supply chain challenges persist, we feel good about current inventory levels and ongoing access. We expect our pace of capital investment to temper throughout the balance of the year.

Adjusted EBITDA less capital expenditures was $120.2 million for the second quarter. In the second quarter of 2022, we distributed $16.4 million in dividends to shareholders. We repurchased approximately 96,000 shares for $122 million bringing the total capital returned to shareholders during the quarter to $138.4 million.

Year-to-date, we have repurchased nearly 144,000 shares for approximately $192 million. Under the new Board authorization approved during the quarter, we had approximately $403 million remaining for share repurchases at the end of the second quarter, and we will continue to be opportunistic with how we allocate our capital.

Turning to our financial structure. While the increasing rate environment resulted in slightly higher interest expense for the quarter, we feel very well positioned from a balance sheet and liability management perspective as we have been able to proactively take advantage of strong markets over the last couple of years, locking in long-term, low-cost and predominantly fixed rates across our capital structure, a nod to this great team and my predecessor.

From a liquidity standpoint, we had $280 million of cash and cash equivalents on hand as of June 30, and we continue to generate significant free cash flow. At quarter end, our debt balance was approximately $3.9 billion, consisting of approximately $2.3 billion in term loans, $920 million in convertible notes, $650 million in unsecured notes and $5 million of finance lease liabilities. We also had approximately $449 million available for additional borrowings under our revolver as of June 30.

Overall, our [debt to last quarter] annualized adjusted EBITDA after netting cash on hand against debt was at 3.9x as of June 30. During the quarter, we closed 3 transactions. As Julie discussed earlier on June 1, we made a $7.2 million equity investment in Visionary Broadband in partnership with GTCR. We are excited to support the [Visionary] team with growth capital that is used to accelerate their strategy of bringing leading broad-based solutions to underserved rural markets in Wyoming, Colorado and Montana.

On April 1, we contributed our Tallahassee assets to Metronet systems in exchange for combined cash and equity interest totaled $1 million. The first quarter revenues associated with the operations contributed to Metronet were approximately $530,000.

Finally, on May 20, we divested Hargray's managed IT service, which we considered noncore. The first quarter 2022 revenues associated with Hargray's Managed IT were approximately $1.9 million.

Lastly, as mentioned on previous calls, on the second quarter, we unloaned a majority of our remaining bulk cable video offerings. While we estimate this initiative reduced video revenues by approximately $1.7 million in the second quarter of 2022, more importantly, it has helped to prepare our network for the next generation of high-speed data enhancements, it is also reducing the amount of time and energy spent focusing on an unprofitable product offering and is expected to continue to improve our margins.

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

(Operator Instructions)

The first question comes from the line of Steve Cahall with Wells Fargo.

This is Dan Osley on for Steve. Just had a quick question on fixed wireless, maybe for Julie. If you can talk through the availability of fixed wireless in your footprint today, and how you expect that to change in the near term. I was just trying to assess whether your current growth is in the face of increased competition or if it hasn't quite yet picked up?

You bet. We have information that tells us, and it is preliminary, but that's -- as it relates to [little] specifically because we are seeing, I don't want to say absolute, I'll say, virtually nothing related to Verizon. But T-Mobile's install's share in our footprint is essentially the same as T-Mobile's installs' share in its nation-wide footprint.

Now I think most folks are expecting that fixed wireless will have more of an impact on rural (technical difficulty) gets, but to date, that is not the case. And installed share does not mean that, that share we have taken from any other provider. We have not seen a handful of [extra] churn is remains quite low, record low. So my guess would be that finding customers from [DSL] makes sense to me because we position ourselves as a premium product provider. And so likely, they are getting customers from [lower] end of the funnel.

And Dan, I'll just add -- this is Todd. We've mentioned this on the first quarter call and in some follow-ups. But from a T-Mo perspective, their overlap of us is, again, from third-party resources approximately 40% to 50%. So it's not even a full overlap of our markets.

I like Charter's idea that the fixed broadband customers are in a parking lot waiting to become high-speed Internet customers of ours as their needs for deep, which they will.

The next question comes from the line of Craig Moffett with MoffettNathanson.

Thank you. Julie, with Altice USA staying formally now that they are conducting a process on -- I wonder if you could just comment on your appetite for a transaction of that size?

Craig, it's Todd. Yes. I'd say, consistent with our past practice, as you know, we don't comment on public M&A speculation. But I will tell you right now, we continue to be highly focused on the integration and operational success of the brands that we have recently acquired and the great teams that we're partnering with on those opportunities.

All right. I won't try another roundabout way of asking. Let me switch then to the other obvious question besides fixed wireless, which is fiber and -- see if you could just update us a little bit on what you're seeing in terms of fiber. And both in the rate at which the fiber is expanding across your footprint, and also what you see competitively when a new entrant comes in. We're certainly hearing stories about the cost of fiber deployment rising pretty rapidly with pressures on available labor and that sort of thing. I'm wondering if you're seeing that having any impact on the rate of fiber builds in your footprint?

I'll start off with that. And Todd, you feel brief to add. Yes, you're right. I mean the way we figure in any way, the way we pencil it out, we think that the cost for us for example, to have built ourselves with fiber up 5x the cost going to do. And we know the things that we have for 9 months are coming in today. All of the labor market is like as well, so we're watching, how quickly we can rolled out fiber and tend to have some skepticism, especially with the newer entrants.

Our biggest [over-builders] have been legacy telcos AT&T and CenturyLink specifically. And we do have a smattering of upstarts, some towns, but obviously, nothing that hits all of us since we are in very diverse locations. We ourselves were overbuilders, so I don't know what they will expect when they come into Cable One markets, but I know how we (technical difficulty) go into other markets.

I don't think that at this point in time, we are seeing -- well, I know that we are seeing high levels of churn from any separate [providers] but overall, I would expect that in time, competition is going to it will come more slowly to our markets because of where we're situated and because we're not consolidated in 1 region. But today, we're used what we see. As a matter of fact, going back and looking at 2019, compared to 2022, we think that's (inaudible), our win share flow is in line with actually slightly better than it was back then.

So far, feeling good about our situation, but we're being very focused on making sure that we are providing customers with a service that is incredibly reliable, and that absolutely -- so that we don't worry too much about any folks who are incurring on our footprint.

And Craig, I'll add just a couple of things on that briefly, but we've discussed in the past some of our competitive landscape the fact that in Q1, we talked about approximately 30% of our markets do have a competitor that can provide over 100 megabits of speed that number has moved up about a percentage point. So nominal move there. We've talked about fiber overlay on our network, which is specific to your question, that was about 20% in the first quarter, we're at 21.5% now. So another nominal move up, but not meaningful.

And then we importantly point out where there's more than -- there's 2 or more operators, that number remains still very small at 6% across our market. So I think those are important factors when thinking about that as well. We tend to think about the competition, as Julie said, it's coming. We fight every day down to the neighborhood as if it's there, but it's slower and it's lower in our markets.

I don't know if it's because of maybe some of the economics that you referenced in terms of the cost of fiber deployment. But I can tell you on time and on budget for those models is critically important and on time with labor and supplies is hard to predict right now. We're seeing it and navigating it through it, and I know others are the penetration ramps for those are very critically important.

And I know our competitive awareness is very high. So we fight very hard against those. And I would say then obviously, the price at which you sell that service is kind of the third important leg of those stools, if you're going to have a successful business model and the escalations of that price, and we do think that, that will continue as people look to both ours as others, fiber deployments as a critical need. That's not even mentioning the capital markets. As I mentioned in my remarks, we feel really good about our position. But if you're raising capital out in the debt capital markets right now for those platforms, it's not as easy as it was 9 months ago.

The next question comes from the line of Frank Louthan with Raymond James.

Great. And I apologize if I missed this at beginning of the call. But in the release, it says G&A was up a little bit, partially due to bad debt. Can you comment on that? Or is that just the accountants being conservative? Or are you seeing any actual change in consumer behavior? And then if you can comment on any capital you may be putting into the JV that you have this year, what the total amount that might be bank?

Frank, I'll take the first one. And Julie -- well, I'll take the second 1 in terms of the capital in the JV and Julie can comment on the bad debt, I'm happy to as well. In terms of the JV, as we've stated before, that Clearwave fiber JV, I'm assuming you're referencing with capitalized initially at the beginning of this year with $320 million of cash and do not have any anticipation of putting incremental capital into that business outside of if there were to be meaningful M&A opportunities that they identified in pursuit.

Yes. And Frank, bad debt was up from last year. But again, if we compare back to 2019, it's actually lower than '19 levels, whether on a quarterly basis or a year-to-date basis. So bad debt -- is not a problem, it's just growth from the pandemic years. Everything is just sort of falling back into normal levels again. That's the way I think about it.

Okay. Great. That's very helpful. And I think you gave the amount of the buyback authorization that was still at the end of the quarter. Can you update us on what it is quarter-to-date?

We cannot in terms of after the quarter ended. But at the time that the quarter ended we did have that $403 million remaining and recall that the authorization that we approved and announced early in the second quarter was $450 million.

The next question is from the line of Brandon Nispel with KeyBanc Capital Bank.

Great. I must be a little bit slow today, but could you just unpack the organic HSD net additions this quarter with the divestment of the Tallahassee portfolio? And then what are you seeing to date in the third quarter?

I caught some of what you said, Brandon, but not all of it. Starting with the backward part, year-to-date, again, through -- I mean, through the third quarter, meaning just July, we got us (technical difficulty) and typically August and September month of the year. So the third quarter as well from how July went, I think you also said something about Tallahassee.

Yes, Brandon, on that real quick. Brandon, on Tallahassee, that was -- there were no residential customers that was all bid services or that was divested I'm sorry, HMIT was all biz services, Tallahassee also was all biz services, which was contributed to Metronet. Does that help?

Yes, I think it does.

And then on the -- the only thing on the pro forma, Brandon, I apologize as I just spoke over to you, on the residential Internet service, there was some adjustments consistent with what we disclosed on the first quarter call that were related to the Clearwave Fiber deconsolidation as well as CableAmerica. Those would be the only pro forma adjustments. So we reported 41,000 customers on a year-over-year basis. When adjusting for those 2 events, it's 35,000 or 3.8% growth.

(Operator Instructions)

There are no additional questions at this time. I will pass it back to the management for closing remarks.

Thank you, Tia. Excuse me. As always, I would like to thank our associates for their incredible work on behalf of our customers in Cable One. We appreciate everyone joining us for today's call, and we look forward to speaking with you again next quarter. Todd and I will both be attending the (technical difficulty) conference, assuming I get a negative COVID test, in Colorado [next]. We hope to see many of you there, so...

That concludes today's conference call. Thank you. You may now disconnect your lines.