Cable One, Inc (CABO) Q3 2021 Earnings Call Transcript

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Cable One, Inc (CABO -0.68%)
Q3 2021 Earnings Call
Nov 4, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Cable One Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you today. [Operator Instructions] I will now hand the call over to your host, Steven Cochran, Chief Financial Officer at Cable One. Steven, over to you.

Steven Scott Cochran -- Chief financial officer

Thank you, Bethany. Good afternoon, and welcome to Cable One's Third Quarter 2021 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 the discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles or GAAP. Reconciliation 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 -- Chairwoman, President and Chief Executive Officer

Thank you, Steven, and good afternoon, everyone. We appreciate you joining us for today's call. The third quarter now marks the 22nd consecutive quarter in which we have delivered strong year-over-year results. Revenues increased by 26.9% compared to the prior year quarter. Adjusted EBITDA increased by 26.4%, and adjusted EBITDA margin was 51.2%. On a year-over-year basis, and excluding the impact of Hargray operations, which were acquired on May 1, revenues and adjusted EBITDA increased by 5.6% and 12.5%, respectively, and adjusted EBITDA margin was 53.3%, which is a 320-basis-point increase over prior year. I'm incredibly proud of the solid growth our team continues to deliver from one quarter to the next, particularly with the added challenges presented by the pandemic. Our consistency is a direct result of executing a unique data-centric strategy, the core competencies that we have built up around that strategy and our people, who continue to execute and are truly the backbone of our success. We believe this consistency is sustainable as a result of both the organic and inorganic growth opportunities that lie ahead. While there are many aspects of our company that make us unique, I'd like to take a moment to highlight just a few of our key differentiators. Since our early days, we have intentionally chosen to operate in small cities and large towns across rural America, where we consistently provide measurably better products and services than alternative providers.

Within our rural market demographics, only 25% of our competitors provide broadband service with download speeds of 100 megs or higher. Despite this advantage, we operate as if every market is highly competitive setting ourselves apart from our competition by creating an exceptional local customer experience that includes reliable, high-speed, value-based broadband services. Due to our strategic pivot from linear video years in advance of our peers, today, more than 70% of our revenue is driven by higher margin and predictable residential HSD and business services, a favorable product mix that we feel continues to insulate us from the risks and underlying trends in the low-margin video marketplace. Finally, we believe we are a natural aggregator of rural broadband assets across the U.S. and have proven this with the 13 transactions we have successfully acquired or partnered on to date. With a balance sheet that is flexible by design, we are confident we will continue to identify accretive investments in the years to come. Speaking of acquisitions and investments, we would like to welcome our new associates from CableAmerica. We are very excited to have you join the Cable One family of brands when we closed on this transaction. And we will be discussing this exciting news as well as some of our other recent investments a bit later on the call. Provided that the environment around the pandemic is appropriate for travel, we hope to share even more color about what makes our business unique during our planned Investor Day, tentatively scheduled for after our fourth quarter full year earnings release in the spring of 2022.

Turning to our residential high-speed Internet service, customer growth in Q3 remained well above pre-pandemic trends driven by both connects and churn that significantly outperformed the same period in 2019. In the third quarter, we added nearly 13,000 residential HSD customers on a sequential basis, bringing our total HSD penetration to 38.8%. On a year-over-year basis, when excluding for both Hargray and Anniston operations that were contributed to Hargray in 2020, we added approximately 55,000 residential HSD customers. These results highlight not only how far we have come, but also the significant growth opportunities that lie ahead. Additionally, our residential HSD ARPU grew by 5.1% year-over-year, driven by both upgrades and sell-in to higher speed tiers. As we've mentioned before, we have not increased our service rates on legacy systems since the fall of 2015, and we actually decreased prices on our higher tiers at the start of 2019. Sell-in for our gigabit speed tier, which we now offer across 98% of our footprint, reached 14% for the quarter. As a reminder, we began launching gig service to residential customers as early as 2016, well before many of our industry counterparts. Five years ago, gig speeds were virtually unheard of in nonurban markets across the U.S., and we are proud to have been able to level the playing field for rural markets where access to affordable high-speed Internet is just as vital as in more urban areas. Gig speed is just beginning of the story, though.

Through our HFC technology roadmap, we are implementing the upgrades needed for our network to bring multi-gig symmetrical speeds to our markets and laying the groundwork for 10G in the future. In short, we are building a network with the powering capacities to support the digital future of the one million-plus customers we serve, extend broadband service to areas previously unserved or underserved and ensure that we continue to stay well ahead of the consumer consumption curve. As a result of our continued investment, our network continues to perform well, delivering the reliability and speed our customers have come to count on. Despite average data usage growing to 488-gigabit per month in the third quarter, our downstream plant utilization during peak hours improved from 19% to 17%, and upstream utilization maintained below 20%. Turning to business services. Our revenues continued to show positive momentum this quarter with growth of 44.2% year-over-year and 8.4% when excluding both Hargray and Anniston operations. As our product mix continues to shift away from video and phone toward SMB and enterprise connectivity, our margins should continue to expand predictably. To round out another quarter of strong growth, return to our minority investments where residential HSD and business data customers grew by approximately 4,700 on a sequential basis. While these customers are not reported in our results, these results highlight the value and shared commitment of our strategic partners. Moving to integrations. We are pleased with the progress our teams are making in this area. On the Fidelity side, we've seen nearly 1,000 miles of plant upgrades completed since the acquisition as their operating metrics and margins continue moving up to Sparklight levels.

At Hargray, our teams have been working diligently on our 3-year integration roadmap, and we feel very good about the plan that we are preparing to execute against. Hargray is a great company with talented associates who fit in very nicely with Cable One. Turning to M&A. In early October, we entered into an agreement to purchase CableAmerica's Missouri operations for $113 million in cash on a debt-free basis subject to customary post-closing adjustments. CableAmerica is a high-speed Internet, cable and telephone service provider with approximately 14,000 HSD customers in rural markets throughout Central Missouri. Due to its adjacency to our Fidelity markets as well as alignment with culture, growth and competitive profile, we expect CableAmerica to be an excellent fit to our growing family of brands. The transaction is expected to be financed with cash on hand and close prior to year-end. On a related note, we believe a compelling use of our capital comes from building fiber and expanding the network to drive additional growth. We've realized great results in the markets we have expanded into thus far. In this quarter, we spent our highest ever $21.8 million in network expansion, pulling forward materials purchased for future opportunities. While these internal efforts will continue, we've identified a potential joint venture transaction that we expect will both accelerate the growth trajectory of these new market buildouts while also improving the free cash flow and deleveraging profile of stand-alone Cable One.

In this potential joint venture, Cable One will receive a majority equity interest in the newly formed company in exchange for contributing Clearwave minus its tower business and certain assets of Hargray Fiber, while our partners would make a significant cash investment to fund the accelerated growth. We are partnering with GTCR, our current partner and Mega Broadband; Stephens Capital, Clearwave's previous owner and our current partner in Whisper; and the Pritzker Organization, Hargray's previous owner. Michael Gottdenker, former Chairman and CEO of Hargray will serve as Executive Chair and David Armistead, former Senior Vice President at Hargray, will serve as CEO of the proposed stand-alone company. This venture would allow us to have a proven and dedicated team that can be hyper-focused on accelerating market expansion in new and existing systems. This will also allow Cable One's team to remain focused on our primary business, increasing penetration rates, integrating recently acquired companies and driving higher margins and greater free cash flow. At this time, the terms of the transaction remains subject to negotiation and the parties have not yet entered into any definitive agreements to consummate the joint venture. So there can be no assurance that the joint venture transaction will be completed. Our confidence in our long-term outlook remains unwavering. The consistent strength of our results continues to give us confidence in our strategy. And as we look to the future, Cable One will continue to do what we do best, remain agile and execute at the highest level. Before I hand the call over to Steven, I want to briefly touch on a few other notable events for the quarter, starting with a big congratulations to all the associates across our family of brands.

Cable One was recently recognized by Cablefax Magazine in their 2021 Top Ops issue as the Cablefax MSO M&A Mover for our acquisition and integration work over the past several years, none of which could have been achieved without the dedication of each and every one of our associates. In recognition of the tireless work our associates have put in over the past 1.5 years during the many challenges we faced, we recently closed all offices across our family of brands for the first time in our history and gave our associates an additional paid day off. We call this Cable One Connect Day and created the day so that our associates could relax, recharge and spend time connecting with their loved ones. While it's critical to keep our customers connected to what matters most, we know it's equally as important for our associates to care for themselves and those closest to them. Additionally, in recognition of the hard work of our frontline associates, we increased their 2021 bonus targets. Finally, I am pleased to share that later this month, we will be awarding more than $100,000 in grants to nonprofit organizations across our 24-state footprint through the company's charitable Giving Fund, which launched in January 2021. The Charitable Giving Fund, which generally awards $200,000 in grants to local nonprofit organizations in our markets concentrate support in the areas of education and digital literacy, hunger relief and community development. And now, Steven.

Steven Scott Cochran -- Chief financial officer

Thanks, Julie. Now let's turn to our results. Revenues for the third quarter of 2021 were $430.2 million compared to $339 million in the prior year quarter, a 26.9% increase. This increase, which included $78.4 million of revenues from Hargray operations was fueled by a residential HSD revenue increase of 26% and a business services revenue increase of 44.2%. To give a sense of our growth, when excluding both Hargray and Anniston operations, we would have seen third quarter total revenue increased by 6.8%; residential HSD revenue increased by 12.9%; and business service revenue increased by 8.4%. Residential HSD customers grew by approximately $151,000 or 19.2% year-over-year. approximately 110,000 residential data PSUs came to Cable One in the Hargray acquisition. Of these, approximately 19,000 were contributed to Hargray in the Anniston Exchange in October of 2020. Similar to most peers in the industry, we suggest that earlier this year that our HSD net gains in 2021 would likely return to 2019 levels. But our third quarter once again outperformed the same period in 2019. In fact, if we exclude the customers added at the time of the closing of each of our various acquisitions, through three quarters of this year, we have more than doubled our 2019 organic customer growth and nearly tripled 2018.

Operating expenses were $121.7 million or 28.3% of revenues in the third quarter compared to $107.3 million or 31.7% of revenue in the prior year quarter, a 340-basis-point improvement driven largely by a decrease in programming and labor cost. Selling and general and administrative expenses were $95.1 million for the third quarter of 2021 compared to $62.6 million in the prior year quarter. These expenses were 22.1% of revenues in the third quarter of 2021 compared to 18.5% of revenues in the prior year quarter. The pandemic has certainly contributed to a fluctuation in our expenses from one quarter to the next and will likely continue to do so. As a reminder, we are comparing against Q3 of last year during which time, among other items, we reversed a large portion of our bad debt reserve, reduced marketing spend as a result of already elevated demand and had lower-than-normal health insurance cost. This quarter, in addition to the $21.7 million of SG&A costs associated with the Hargray operations, we also had a $1.6 million bonus accrual catch-up for the hard work of our frontline associates that Julie mentioned earlier in the call. While quarterly lumpiness will always be a factor, over the longer term, we firmly believe in our ability to drive cost efficiencies while maintaining a high level of service.

Net income for the third quarter was $52.3 million. Net income included a $25.6 million noncash loss on fair value adjustment associated with the call and put options to acquire the remaining equity interest in Mega Broadband Investments. As a reminder, the MBI options are subject to mark-to-market accounting on a quarterly basis. Until these options are exercised or expire, any changes in the assumptions used to determine their fair value could increase or decrease the resulting valuation, which in turn could cause significant nonoperating fluctuations in our GAAP financial results from one quarter to the next. Net income per share on a fully diluted basis was $8.33 per share, inclusive of the noncash loss just mentioned. Adjusted EBITDA was $220.5 million for the third quarter, including $34.7 million from Hargray operations. This increased 26.4% from the prior year quarter. Our adjusted EBITDA margin was 51.2% or 52.8% when excluding the impact of the Hargray operations. Capital expenditures totaled $120.9 million for the third quarter of 2021, which equates to 54.8% of adjusted EBITDA. During the quarter, we invested $21.8 million of capex and network expansion and $2.9 million for integration activities, bringing our total for the year to $52.6 million and $9.3 million, respectively. In addition to accelerated expansion capital, our quarterly increase is largely driven by a proactive pull forward and spend to ensure we have materials to support our continued growth in the midst of concerns around supply chain delays. While capital spend will vary from quarter-to-quarter, overall, nothing has changed in our long-term capital deployment strategy.

Adjusted EBITDA less capital expenditures was $99.6 million for the third quarter and was flat from the prior year quarter as driven by the increased capex we just discussed. In the third quarter of 2021, we increased our quarterly dividend from $2.50 per share to $2.75 per share, resulting in a $16.6 million in dividends being distributed to shareholders during the quarter. From a liquidity standpoint, we had approximately $490 million of cash and cash equivalents on hand as of September 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 the unsecured notes and $6 million of finance lease liabilities. We also had approximately $459 million available for additional borrowing under our revolver as of September 30. Overall, our debt to last quarter annualized adjusted EBITDA after netting cash on hand against debt was 3.9 times as of September 30. After the end of the quarter, we also entered into or closed three transactions. On October 1, we made a $25 million investment for a less than 10% equity interest in Point Broadband Holdings, LLC, a privately held Internet service provider serving residential and business customers in rural and suburban areas in Eastern United States.

This investment adds to our ongoing partnership with GTCR, our current partners in Mega Broadband. As discussed earlier, on October 8, we entered into an agreement to purchase certain assets and assume certain liabilities from CableAmerica, a data, video and voice service provider of $113 million in cash on a debt-free basis, subject to customary post-closing adjustments. The acquisition is subject to customary closing conditions, and we expect the transaction to close before the end of the year. Lastly, on October 18, we completed a minority equity investment for less than 10% ownership interest in Tristar Acquisition I Corp, a special purpose acquisition company for $20.8 million. We see this as another way to partner with an experienced management team that is focused on rural telecommunications. We also believe our relationship with Tristar could lead to incremental opportunities for Cable One in the future. With that, Bethany, we are now ready for questions.

Questions and Answers:

Operator

Thankyou [Operator Instructions] Our first question comes from Steven Cahall from Wells Fargo. Please go ahead.

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Thanks Steve, you sounded pretty confident on the pace of residential broadband net adds year-to-date being more than 2 times 2019. And I think your penetration passing is really still only around 35%. So I'm just trying to think, is that low double-digit millions that you're doing in terms of quarterly net adds, something that you feel like is sustainable for the periods ahead? Is that a good run rate for us to think about?

Steven Scott Cochran -- Chief financial officer

Repeat what you said as the run rate because I didn't catch that.

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Yes, low double digits, so $10 million, $12 million, something in that sort of range as an organic number.

Steven Scott Cochran -- Chief financial officer

You mean thousand, correct?

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Yes. Sorry, sorry.

Steven Scott Cochran -- Chief financial officer

So we have not given guidance other than to say that we think things trend back toward 2019. We felt good about our ability to continue to deliver hiring. Our residential broadband penetration is closer to 39%. I think sometimes the numbers get mixed because people look at our total homes passed, which include business service passings as well. But in totality, I think we continue to see higher growth rates than what we did pre-pandemic, and we feel really good about that and the ability to continue to drive toward that.

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Great. And then your residential ARPU data growth was about 5%, I think, in the quarter, and I think 6% is where you were in the first half of the year. Anything we should read into that? Is that the mix effect from the Hargray's integration? Or just any other thoughts on residential data ARPU? Thanks.

Steven Scott Cochran -- Chief financial officer

Yes. I mean I think there is a I mean, clearly, there's a decent amount of noise in that number, just given the impact of Hargray coming in and Anniston leaving from last year when you look truly at just the year-over-year. I think what we are continuing to see is a pretty consistent mid-single-digit ARPU increase on the HSD product.

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

It actually is intentional as we've been playing with the levers of growth unit growth versus ARPU and trying to balance both of those for the good long-term sustainable growth and value in the minds of our customers. One of the things that we've been doing for a while now is experimenting with pricing and promotions around our unlimited, and that is having an effect on that as well. But I wouldn't read too much into it. It's strong growth, and we can lever it up or down as we see fit. Remember, we have not done a service increase in the legacy system since 2015.

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Yeah great thankyou.

Operator

The next question comes from Brandon Nispel at KeyBanc Capital Markets. your line is now open.

Brandon Lee Nispel -- KeyBanc Capital Markets Inc -- Analyst

Great I wanted to see if you had any more color on the potential joint venture that came out in the 8-K yesterday. And specifically, could you give us percentage of capital you're spending today on fiber, which we would think of as sort of going with that JV? And then just on the expense side, where do you see margins going? How much ability do you have to toggle things like SG&A going forward? Thanks.

Steven Scott Cochran -- Chief financial officer

Sure. So I will hit the first one on the partnership. I mean I think so I think there's a question of what gets removed from our numbers versus what is incremental opportunity that we would have tried to figure out how we take on internally. And so what this I think this partnership allows us to do is accelerate even beyond where we're at today. So I think the numbers we gave earlier were in the low-50 millions of dollars that we've spent year-to-date, which would lead us toward another quarter spending at that level, call it, $70 million just to if we just added on. We similarly did the same thing in the fourth quarter that we did in the third. And so we will be able to reduce that number. We won't completely [Technical Issues] that number because we will still do some level of expansion within our footprint. What we see more is a great platform or two great platforms to actually have the ability to go and really accelerate and saw a challenge in being able to do that because to put an organization like that in place, is a lot of people, a lot of expense, a lot of capital and was both going to negatively impact our margins as well as our free cash flow, if we tried to truly go after it. Additionally, there's a focus issue, too. It takes a lot of people and a lot of leadership and our ability to leverage a leadership team that we're really comfortable with already and then to be able to leverage their history to go and pull a team together to be 100% focused on this and allowed this to set outside a public arena and to go operate as a stand-alone company and then think about down the road the opportunity to bring it back into the company when it's a matured business.

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

You know Related to the margin question. And while we don't give guidance, what I can tell you, Brandon, and I think you know by virtue of spending time with us. We have, what I call, a discipline of focus, and Steven just referenced that. And it ties into a continuous improvement mentality. And we believe that we can constantly be making things incrementally better. And I think you see that in our results over the long term. I would expect that we would continue to drive toward this.

Steven Scott Cochran -- Chief financial officer

Yes. And Brandon, and specific as it relates to this quarter, I think one thing we also don't do is, we don't we don't very intentionally try to manage the quarters per se. We are very focused on looking at year-over-year and making sure that in any given year, that we're seeing margin expansion take place. And that's why we gave the year-to-date number and focused on the 320-basis-point improvement we've had in the first nine months compared to the last the first nine months of last year. And while any given quarter we may see ups and downs in that, we feel really good about the long-term trajectory of that.

Brandon Lee Nispel -- KeyBanc Capital Markets Inc -- Analyst

Ok Thankyou.

Operator

[Operator Instructions] Our next question comes from Frank Louthan at Raymond James.

Frank Garrett Louthan -- Raymond James & Associates, Inc -- Analyst

Great thankyou Just curious, if you saw any impact from EBB in the quarter, if you can talk to that? And any thoughts on those customers going forward? And then I've got a follow-up.

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

So we have approximately 10,000 EBB customers at this point in time. The number of EBB customers coming on, on a daily basis has stayed fairly consistent. The vast majority of the EBB customers are existing customers. And they are taking the opportunity to use these new found funds to increase their broadband speeds that is, they're taking higher tiers. It has not been a large driver of new customers for us.

Frank Garrett Louthan -- Raymond James & Associates, Inc -- Analyst

Okay. Great thank you. And looking forward, have you seen any changes in the demographic trends with some of your gross adds? Some of your peers have seen drop off in lower income, folks that were more regular in the gross adds. Have you seen any changes in those types of trends?

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

Actually, no. Steve and I were just talking about it this morning. I took a look at it. And we our customers now look like our customers before. We have a just tiniest slight uptick in lower-income customers, which I actually would expect given how we have marketed in the past and the demographics of our market. But we do not see that which you heard I believe chatter talk about. But it makes sense. We're different.

Operator

We have no further questions in the queue. So I'll hand the call back to Steven and Julie for any closing remarks.

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

Thank you, Bethany. We appreciate everyone joining us for today's call and look forward to speaking with you all again next quarter. Thanks.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Steven Scott Cochran -- Chief financial officer

Julia M. Laulis -- Chairwoman, President and Chief Executive Officer

Steven Lee Cahall -- Wells Fargo Securities, LLC -- Analyst

Brandon Lee Nispel -- KeyBanc Capital Markets Inc -- Analyst

Frank Garrett Louthan -- Raymond James & Associates, Inc -- Analyst

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