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Cable One Inc (NYSE:CABO)
Q2 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Cable ONE, CABO, Earnings Report Q2 2019 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Steven Cochran, CFO. Please go ahead.

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Thank you, Ashley. Good afternoon and welcome to Cable ONE's second quarter 2019 earnings call. We're glad to have you join us as we review our results.

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 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 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 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.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Thank you, Steven. Good afternoon and thank you for joining us for our second quarter 2019 earnings call and our first earnings call with a large portion of our Company now branded as Sparklight. I will review a few highlights and then hand it over to Steven for a full recap of our financial performance.

First, I would like to thank our associates for providing our customers with outstanding service. As a result of their commitment and dedication, we're recently recognized by Cablefax as the top customer service provider among all midsize operators. Additionally, we were honored to be named on the Forbes' 2019 list of America's Best Midsize Employers. Cable ONE was the only MSO recognized on this list.

Our positive second quarter results flow from the work of those outstanding associates. Some highlights include year-over-year increases in total revenues of 6.4% and adjusted EBITDA of 8.1%. Our adjusted EBITDA margins increased 80 basis points year-over-year to 48.2% for the quarter. The solid growth and improved margins are reflective of the sustained mix shift driven by our business strategy, the impact of our new residential HSD pricing and packaging, and the continuous improvement mindset with which we run our business. We saw a 3.4% residential HSD unit increase and residential HSD ARPU was up 4.9% year-over-year resulting in an 8.5% increase in residential HSD revenues. Business service revenues were up 29.3% year-over-year or 11.7% excluding the impact of Clearwave.

We are very pleased that our two primary growth drivers are performing so well. Our residential HSD pricing and packaging changes have resulted in a nice mix of unit and ARPU increases, which are being fueled by customer choice rather than implementing an across the board rate adjustment. We have also been taking a steadily increasing share of Business Services segment by generating more sales up market from the existing customer base. We see this work as vital to driving our core business, which is a top priority.

In parallel, we are devoting significant resources toward integration, planning and execution associated with our three accretive acquisitions. On top of those activities, we have allocated ample efforts to our Sparklight rebrand in legacy Cable ONE markets which our customers began seeing in early June. While we are nearing the end of NewWave integration efforts, we still have projects that are creating real value and improving the customer experience. Our teams are making significant progress with network upgrades and standardization, and we are in the process of launching gigabit speeds across the majority of these markets as well as implementing usage-based billing. The migration of phone customers onto our provisioning is essentially complete, which will result in further synergy realization.

Finally, we are in the process of decommissioning the office and data center in Sikeston, Missouri while finalizing our expansion of the customer care and operations center in nearby Poplar Bluff. With this expansion, all care centers will be fully integrated. While there is also simulation activity in connection with the Clearwave acquisition, we are pursuing operational synergies by aligning our teams more closely, so that we are maximizing learnings across the entire organization. Meanwhile, we are excited to support Clearwave's expansion plans while helping them develop and implement strategies to accelerate growth. We believe Clearwave is well positioned to continue its upward sales trajectory and we are investing in that business to capture even further gains.

We have also been very fortunate to get to know the team at Fidelity prior to close. We appreciate the enthusiasm and the spirit of teamwork from both the ownership group and the associates who will be joining us as we prepare for the expected closing of this transaction. Not surprisingly, Fidelity is having another strong year as well, which is reflective of their leadership and focus. Fidelity is a great company in wonderful markets, but more importantly we are gaining a talented group of associates who we believe will fit in very nicely at Cable ONE.

We are making excellent progress on our rebrand to Sparklight. Our website and customer billing now reflect our new brand. Associates in our systems are wearing Sparklight uniforms and badges, and truck wraps and signage are well under way. We have engaged both associates and customers in the new brand through a variety of mediums and we are thrilled by the positive response we received. We will be hosting Sparklight launch parties for the communities we serve throughout the remainder of the summer and into the fall to engage our customers with our new brand.

We're pleased to announce another dividend increase earlier this week of 12.5% to $2.25 per share quarterly dividend or from $8 to $9 per share on an annualized basis.

Before I hand the call over to Steven, I'd like to take a moment to welcome Mary Meduski, the newest member of the Cable ONE Board. We are very fortunate to have an accomplished and engaged Board, and Mary will further add to that with her insight and extensive background in media, telecommunications and technology industries.

And now, Steven will provide more financial details on our second quarter results.

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Thanks, Julie. The second quarter of 2019 once again produced strong financial results. Revenues for the second quarter of 2019 were $285.7 million compared to $268.4 million in the prior year quarter, representing a 6.4% increase. As Julie mentioned, this increase was fueled by residential HSD revenue increase of 8.5% and Business Services revenue increase of 29.3%. Excluding Clearwave operations, total revenue increased 3.9% year over year. Net income in the second quarter was $36.4 million and net income per share on a fully diluted basis was $6.35 per share. Operating expenses were $95.7 million or 33.5% of revenues in the second quarter compared to $91.8 million or 34.2% of revenues in the prior-year quarter, or a 70 basis point improvement.

Selling, general and administrative expenses were $60.1 million or 21% of revenues, and $54.2 million or 20.2% of revenues for the second quarter of 2019 and 2018, respectively. The increase in SG&A was primarily attributed to higher rebranding, acquisition related and other expenses incurred during the quarter as well as additional costs related to the Clearwave operations.

Adjusted EBITDA was $137.6 million for the second quarter of 2019, and increased 8.1% from $127.2 million in the prior year quarter. Our adjusted EBITDA margin increased 80 basis points year-over-year going from 47.4% to 48.2%. Capital expenditures totaled $63.9 million and $49.8 million for the second quarter of 2019 and 2018, respectively. Included in the current quarter were $2.5 million of capital expenditures related to Clearwave operations. Year-to-date capital expenditures as a percentage of adjusted EBITDA and revenue were 40.8% and 19.6%, respectively, in line with our expectations.

In the second quarter of 2019, we paid $11.4 million in dividends to shareholders. During the quarter, we borrowed $325 million under our new term loan B maturing in 2026. We also refinanced our existing term loan A with a new $250 million term loan A, established a new $450 million delayed draw term loan A, and expanded the capacity of our revolving credit facility to $350 million. These loans mature in 2024. Proceeds from these transactions together with cash on hand were used to redeem $450 million of senior unsecured notes on June 15, with the remainder to be used to finance the Fidelity acquisition, which is expected to close early in the fourth quarter, and for other general corporate purposes.

From a liquidity standpoint, we remain in excellent position as we had approximately $102 million of cash on hand as of June 30. We continued to generate significant free cash flow. And at quarter end, our debt balance was approximately $1.3 billion, consisting of term loan borrowings. Overall, our debt to adjusted EBITDA after netting cash on hand against debt was at 2.2 times, providing us with ample liquidity. We also had $345 -- $344.5 million of available for borrowings under our revolving credit facility as of the quarter end.

On a separate note, our residential voice ARPU increased $4.10 from prior year as a result of certain passthrough fees that were reported on a net basis historically. Residential voice ARPU would have decreased slightly to $33.14 from $33.22 if reported on a comparable basis. We are pleased with another healthy quarter and excited about the opportunities we have ahead as we look forward to a busy second half of the year.

Ashley, we're now ready for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Zack Silver, B. Riley FBR. Please go ahead.

Zack Silver -- B. Riley FBR -- Analyst

Okay. Great, thank you for taking the question. I'm wondering if we can talk first about the rebranding and whether you've seen any early benefit or maybe even negatives from a subscriber perspective with regard to either gross adds or churn?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Hi, Zack, it's Julie. I think it really is too early. I mean, we just started going out to market in June and the actual system locations are just signing -- changing signage, uniforms, trucks as we speak on a rolling basis. It doesn't just flash cut. We did do a baseline study with our customers before we began and we will do another one at the end of the summer, as well as at the end of the year to capture their understanding of the brand and their interactions and perception of the brand.

I would say from social and talking to our associates, the consumers are having similar reactions to the brand as our own associates did. I think they like the idea of it but they are -- some of them are like are we sending the payment to the right place? In this day and age of security people are very concerned is Cable ONE Sparklight? Is this -- is my check going to the right place? Did somebody buy Cable ONE. So we're clarifying things like that. So it's early.

Zack Silver -- B. Riley FBR -- Analyst

Okay, that's great. And then another one kind of a two parter is just if you could update us on the unlimited plan penetration. And then, perhaps, you guys are still getting a benefit from customers taking higher-speed tiers, but just wondering if you've seen -- not any change in the actual number of customers taking them, but I guess the rate of change and the amount of customers going up tier from maybe the year-ago period?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Sure. Maybe I'll give a couple of stats from our recent pricing and packaging change that took place in January. We are continuing to see over 50% of the folks sell-in at higher tiers than our standard 100-meg flagship. We are seeing an acceleration and the sell-in of -- our unlimited plan, it is selling in over 10% at this point in time. That's the plan where for $40 additional you get unlimited data on any plan that you buy.

Trying to think of other stats that might be interesting. I think of the people who have our new pricing and packaging at this point in time, our flagship in that group is actually the 200-meg plan. So in our general base, it's still the 100-meg. But -- and those who have the new pricing and packaging, 200-meg is the service level that helping those [Phonetic] customers.

Zack Silver -- B. Riley FBR -- Analyst

Got it. Okay, that's interesting. Thank you very much.

Operator

Your next question comes from Craig Moffett with MoffettNathanson. Please go ahead.

Craig Moffett -- MoffettNathanson -- Analyst

Thank you. For Julie and Steve, a question on margins, if I could. Steve, you called out the still elevated SG&A and some of the reasons why SG&A is higher. If I kind of normalize that you are getting reasonably close to 50% margins, how high do you think margins can get in your business? And as you think about the drivers for that, can you just maybe help us understand the margin trajectory over the -- both the next year or so, and then also longer term?

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Well, [Indecipherable] give any direction on where we go exactly over the next year, but I think what I would say, anyway, to that. And Julie, add if you agree or not. But I think in general, as we continue to migrate and transition our customer base to less and less video, and more and more data and commercial services, both of those have, obviously, much higher gross margin businesses and then much higher EBITDA margin profiles. And so as we continue to make that change, we see no reason why those EBITDA margins won't move to where we think the product margins are.

And with that, I think being in the cable industry for a long time, we always thought 50% was kind of that cap but that was a cap that was going to generated by the fact that video was part of it, and it's a much different mindset now with video being out of it. So I don't think -- we think as a video -- we don't think 50% is any kind of cap and we think we will obviously move -- we'll be on that over the next five to 10 years.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

And I agree. The mix is a big part of it and we do tend to focus on continuously improving on the expense side too, Craig. It's part of the DNA here, so we pay very close attention.

Craig Moffett -- MoffettNathanson -- Analyst

And if I could ask a corollary question. Your capital intensity, I think you've pointed out in the past that you cautioned against excessive enthusiasm for capital intensity declines just because the denominator without video and it is smaller. But can you just talk about kind of the same atmospherics if you will around capital intensity and how we should think about longer-term capital intensity trends?

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Yes. So, I think clearly, we think the base business capital will go down as a percentage of revenue. Will it go down as low? No, not as long as -- not in line with where I think the industry is talking about going. And that's for the base capital. I mean -- to be perfectly honest, I mean the best use of our capital is to invest back in the business. And more than anything, we want opportunities to expand fiber, expand network, grow customers, especially invest within our commercial business. And so while we believe it will go down on what the base is, just because of the nature of the growth in the efficiency and the investments we've made in the network already. Our hope is actually that we find many opportunities to redeploy our cash back into the business. So we probably, one, we don't give guidance in general, but we probably give even less guidance on this because we're looking for opportunities to be able to invest in the business because we think that's the best way to get shareholder return.

Craig Moffett -- MoffettNathanson -- Analyst

All right, thank you.

Operator

Your next question comes from Philip Cusick with JPMorgan. Please go ahead.

Philip Cusick -- JPMorgan -- Analyst

Hi, thanks. Julie, can you give us an update on what your typical promotions are in more and less competitive markets? And what that mix of sales looks like?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Sure. So in 2018, we sort of had what I would refer to as a cooling off period where we were establishing value with our customers. So what we did is we pulled off of our promotions and used our everyday price to, again, really established value. Then we started doing tests across a variety of different markets to figure out what customer choice is appealed most, and then we launched our pricing and packaging in January of this year. This year, we -- the majority of the time we have basically everyday low pricing with short periods of sale. And those periods of sale are typically, well, they are always on, our flagship service, our 100-meg service. So that is to say, and here's maybe an interesting point that when someone gets a promotion, they get a promotion on the 100-meg service. We just said that over 50% of the people who are taking our new pricing and packaging are coming in above that level. All the services and tiers above that level are not just counted, they do not have promotions around them. So the thing that does have promotions around it is the flagship service, and in certain markets and certain demographics are 15-meg service. And typically, that will be $10 off the retail rate for three months on occasion longer.

Philip Cusick -- JPMorgan -- Analyst

And you've talked about pushing harder in some of the -- again, some of the more competitive markets. Is that not happening anymore today?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Yes, no. We definitely do not have one size fits all anymore. And our -- what I would call our hypercompetitive markets, because technically all of our markets are -- have some sort of competition, whether it's big or so not [Phonetic] we could debate. But in our hypercompetitive markets, we -- our biggest lever is, honestly, unlimited data, and that's what those markets get versus reduced pricing by in large.

Philip Cusick -- JPMorgan -- Analyst

Got it. I understand. And between integration, savings and revenue picking up, we've talked about EBITDA performance ramping through the year. Any reason to think that doesn't happen?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

No, actually I see -- when I think about how our year is shaping up, our strategy for the year is really playing out and momentum is gathering. If you think about it, we didn't take an across the board rate adjustment for HSD in January, instead we did our new pricing and packaging. And as the year goes by, we have more and more people on those packages that have higher selling, they take the unlimited that drive the ARPU up, as well as we're just rolling out usage-based billing in NewWave at this point in time, and the [Indecipherable] really start kicking in toward the end of the year and into 2020. So I think momentum is on our side.

Philip Cusick -- JPMorgan -- Analyst

Great. Thanks very much.

Operator

Your next question comes from Brandon Nispel with KeyBanc. Please go ahead.

Brandon Nispel -- KeyBanc -- Analyst

Hey, thanks for taking the questions. Julia, I'm curious, have you ever tried to quantify what the addressable market is in your footprint for Business Services. And then you mentioned accelerating some investments there with Clearwave. Can you talk about where those are going to support? Thanks.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Sure, sure. So in terms of quantifying -- I think what you're asking, Brandon, is what is our TAM [Phonetic] sort of in the Business Services world?

Brandon Nispel -- KeyBanc -- Analyst

Right.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Yes, yes. So we've done that for Legacy CABO. We have not done that for NewWave, certainly not for Fidelity yet.

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

And we have it for Clearwave.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

And we have it for Clearwave. So in part, we have it. And so we sort of use those results and extrapolate. In terms of investments in Clearwave, here are a couple of examples. We are in the process of upgrading our core there from 10 gig to 100 gig, and that's being driven by mobile providers who are asking for that. So we -- basically, the sales are already there and that will be done by the end of the year. We are also putting in capital in order to buy large construction equipment and more fiber, so that they can accelerate on what they're already doing really well. We are also, from an operational standpoint, adding headcount. So those are just a few examples of the investments both from the capital side and operating side that we're making in Clearwave.

Brandon Nispel -- KeyBanc -- Analyst

Got it. I guess I didn't quite catch a TAM number. And then I guess I'm curious, within this commercial business, is it primarily carrier customers enterprise SMB? And what are the products -- the service that you primarily provide?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

I apologize, Brandon. I missed the first part of your question.

Brandon Nispel -- KeyBanc -- Analyst

I was just trying to get the TAM that you guys had for Cable ONE in the business footprint? In your footprint.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

That's not something that we've shared before. We typically will talk about our penetration in the marketplace, but not our total TAM.

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Yes. Needless to say our penetration of the addressable market is much lower than our penetration of customers because we kind of own the SMB businesses in our market and we are really just recently started going after the enterprise and higher level services. And so that's the opportunity that we see in the commercial space, obviously, continuing to serve those customers we have well and [Indecipherable] whatever penetration gains we can, but more importantly, continuing to move up market and gain a greater share of the higher revenue customer opportunities.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Right. And the percentage of sales that are coming from that market segment are growing quarter over quarter.

Brandon Nispel -- KeyBanc -- Analyst

Great. Thank you for taking the question.

Operator

Your next question comes from Stephan Bisson with Wolfe Research. Please go ahead.

Stephan Bisson -- Wolfe Research -- Analyst

Good afternoon. Just a couple. I was wondering -- could you kind of describe Fidelity's profile and how it looks compared to CABO. I guess how far down the road they are on shifting to connectivity and improving margins?

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Sure. So just from a where they at in the process, I would say they are much closer to where we are from a strategy standpoint than NewWave was when NewWave was acquired. Their video penetration looks similar to ours. I think from a mentality standpoint I think there is a lot more people that's kind of already embraced that as a concept as far as where the business is going and how it's going. And so we think that makes that part of the transition much easier. And so from that standpoint we're -- I think, we feel very aligned with where they are.

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Right. From a margin perspective, there's room to continue to look-alike to CABO's financials.

Stephan Bisson -- Wolfe Research -- Analyst

Great. Is that margin improvement where you see the most opportunity in those assets?

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

I guess, I would call it sort of the look-alike to our financials whether from HSD ARPU to overall margins to -- there is a little bit of synergies turn [Phonetic] in there. It's little bit of everything.

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Yes. And they are doing a lot of the same things [Indecipherable] growing commercial, they've got nice opportunities to continue to move up market and commercial they are expanding. And so I think for all of those reasons it's just a great fit. It really just adds additional footprint for us to take a strategy that's working very well and continue expanding that.

Stephan Bisson -- Wolfe Research -- Analyst

Great. Thanks so much.

Operator

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

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Thank you, Ashley. I want to thank all of our associates for a great quarter. I will be participating in a fireside chat at the KeyBanc Capital Markets Technology Conference next Monday, which will be webcast on our Investor Relations site at ir.cableone.net. We appreciate everyone joining us for today's call and we look forward to speaking with you next quarter. Thank you.

Operator

[Operator Closing Remarks].

Duration: 28 minutes

Call participants:

Steven S. Cochran -- Senior Vice President And Chief Financial Officer

Julia M. Laulis -- Chair Of The Board, President And Chief Executive Officer

Zack Silver -- B. Riley FBR -- Analyst

Craig Moffett -- MoffettNathanson -- Analyst

Philip Cusick -- JPMorgan -- Analyst

Brandon Nispel -- KeyBanc -- Analyst

Stephan Bisson -- Wolfe Research -- Analyst

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