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Cable One Inc (NYSE:CABO)
Q3 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Cable One Earnings Report Q3 2019 Conference Call. [Operator Instructions].

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

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

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.

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 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 an experienced 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 provide greater connectivity and faster speed to meet the growing needs of those sized businesses. Our business to be also proceeding with the CRM update that I talked about about earlier in the year which we expect will help us improve efficiencies including a reduction of approximately 30000 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 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 six 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 corporation 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.

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

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 increased 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 $55.8 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 net in cash-on-hand in each 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 three 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 three 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 circulars 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 was 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.

Sarah we're now ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Philip Cusick with JPMorgan.

Philip Cusick -- JPMorgan -- Analyst

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?

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

Yeah, 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.

Philip Cusick -- JPMorgan -- Analyst

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

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

In 2020.

Philip Cusick -- JPMorgan -- Analyst

Okay, And then in terms of the spending I'm surprised that -- given that you are 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?

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

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.

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

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.

Philip Cusick -- JPMorgan -- Analyst

Yeah. That was definitely my question.

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

Okay.

Philip Cusick -- JPMorgan -- Analyst

Well OK. 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?

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

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 rates increase has happened 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 overtime and this is reflective of that.

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

For acquisitions.

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

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

Operator

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

Zack Silver -- B. Riley FBR -- Analyst

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?

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

Zach its 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.

Zack Silver -- B. Riley FBR -- Analyst

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 relationships like Charter and Comcast and Altice are doing.

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

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 ringing into and learning from others and I guess we'll see.

Zack Silver -- B. Riley FBR -- Analyst

That make sense. And then the last one for me. Just on the new planned penetration any update you can give on that? How is that trending? Accelerating? Deaccelerating? A hard number would be great.

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

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 our consumer takes the higher the percentage of unlimited selling. 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.

Operator

Our next question comes from Stephan Bisson with Wolfe research.

Stephan Bisson -- Wolfe research -- Analyst

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

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

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 the 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 obviously we really just started that process again.

Stephan Bisson -- Wolfe research -- Analyst

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

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

Yeah, 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.

Stephan Bisson -- Wolfe research -- Analyst

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?

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

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.

Operator

The next question comes from Craig E Moffett with 2004 MoffettNathanson LLC.

Craig E Moffett -- Moffett Nathanson LLC -- Analyst

I will 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 -- it just operationally? And what kind of pace do you think you'd be able to maintain?

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

Well I think one the first -- the part to the question you asked 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 that 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.

Stephan Bisson -- Wolfe research -- Analyst

And 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?

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

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 test 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 pay 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 stand and how does it fit into our ten year plan? Not what's it going to do for the next quarter.

Operator

Our next question comes from Frank Louthan with Raymond James.

Frank Louthan -- Raymond James -- Analyst

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 setup boxes. Are you promoting or pushing any streaming services like put Netflix up with what you have on there. Are you considering adding any others?

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

Frank its 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 setup 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 connoisseur 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 into 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.

Operator

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

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

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?

Julia M. Laulis -- Chair of the Board, President and Chief Executive Officer

For Fidelity if you take a look at the deck that was posted we're talking about an integration time period of approximately three years. And fidelity is a fantastic acquisition for us. We will do the very similar things that we do 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 three years. In terms of their customers' growth rate I don't think that's the place I'm going to go right now. Thanks.

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

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 felt within what we had originally guided toward 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 three years. There's a handful that come to us from combination of the most senior executives. Moving on and syner savings that come from that. And their own programming realignment that took place right after close. So there is a decent amount that's happened and things 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 overtime 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. And so I would say that they'll come in reasonably even over the three years with a decent kick start right off the bat with some of the initial savings that happened right at the beginning of October.

Operator

This concludes our question-and-answer session. I would 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 Sara, I want to thank all of our associates for another great quarter. We appreciate everyone joining us for todays call and look forward to speaking with you again in 2020. Thank you.

Operator

[Operator Closing Remarks].

Duration: 26 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

Philip Cusick -- JPMorgan -- Analyst

Zack Silver -- B. Riley FBR -- Analyst

Stephan Bisson -- Wolfe research -- Analyst

Craig E Moffett -- Moffett Nathanson LLC -- Analyst

Frank Louthan -- Raymond James -- Analyst

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

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