Cable One, Inc. (CABO) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Cable ONE CABO Earnings Report Q3 2016 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin Coyle, CFO. Please go ahead.

Thank you, operator. Good morning and welcome to Cable ONE's third quarter 2016 earnings call. We're excited to have you with us this morning as we review our results for the quarter. 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 press release and in our recent SEC filings. Cable ONE is under no obligation, and in fact expressly disclaims any obligation to update 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. 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 today on today's call is our Chairman and CEO, Tom Might. And with that, let me turn the call over to Tom.

Thank you, Kevin. And good morning to those listening. Third quarter adjusted EBITDA rose almost $10 million and nearly 13% versus last year, which is another fine quarter. That puts us $262 million for the year so far, up $32 million or 14%. Adjusted EBITDA margins have expanded over 300 basis points from 39% in Q3 last year to 42% this past quarter. Our adjusted EBITDA less CapEx performance was even stronger, as our CapEx spending plans slow down. For the year-to-date period adjusted EBITDA less CapEx is up $40 million which is almost 31% higher than year-to-date versus last year. This is high level evidence, I think of our four-year-old strategy to focus on residential data and business services, which have higher margins and higher growth rates, while harvesting the video sub count businesses, which do not, and it continues work. I have reviewed our strategy in light on past earnings call, so I will take a pass on that today. Where we first imagined strategically changing our focus, residential data and business services only represented about 30% of our total revenues, today at 55% they are a majority of total revenues and they are still rising, up from 48% this time last year. We think that bodes well for the future. Somebody on the call usually asks where video sub counts are headed with our current strategy, I always decline to give guidance, but suggest you follow the historical bread crumbs. In anticipation of the question, I will point out that we were down 86,000 videos subs in Q4 last year, 70,000 in Q1 this year and 60,000 in Q2 this year and now 51,000 in Q3 of this year. You can see the trend with our video sub count, you can also see how video sub losses have not lowered our profitability, that’s just the opposite. With the majority of revenue now coming from the faster growing products and the slowdown of video sub losses, it is our expectation that when you take any small reflection point revenue, our total revenues are up 1.5% year-to-date versus being down 1.6% year-to-date last year. At a little revenue growth to our sustained margin expansion and this is consistent with the long-term growth expectations I've been outlining before. However, year-over-year quarterly comparisons will get tougher for many reasons. We took a 10% residential HSD increase last October, our first in five years, but no HSD increase this year, particularly this October. Total operating expenses were down $24 million or 7% in the first half of 2016, partially due to dual billing systems in the first half of 2015 and lower corporate charges, as a stand alone company after our July 1, 2015 spend. Those favorable year-over-year comparisons were now gone. Nonetheless, our regularly declining programming bill is now lower than it was in 2009. Our operations have been consistently improving since 2008, when we hired our first industrial engineer, first that is other than since that’s my degree as well. For example our truck rolls were down 57% from 2008, and phone calls were down 39% since we moved all agents into virtual companywide call center in 2011. Headcount last quarter was down 7.6% or 157 associates versus a year ago and we've reduced our bad debt from 1.4% that is peak 2.3% of revenues. As I've said in the past, we are seeking out attractive M&A and organic growth opportunity given our gut capacity. We are continually searching for great deals that would be accretive and benefits are shareholders. Like past calls, we are not going to make any further comments about M&A today. With that, let me turn it back over to Kevin for a more detailed review of our results.

Thanks, Tom. As Tom already mentioned, we are very pleased with the results we've achieved during the year-to-date, including our strong performance in the third quarter of 2016. First, let me share a few highlights from the quarter. Tom, already mentioned some of these, but adjusted EBITDA grew by 12.6% with a margin of 42.4%. Adjusted EBITDA less capital expenditures increased by $13.4 million in the quarter year-over-year or 28%. Residential data revenues increased by almost 19%, business services revenues increased by over 13%. Residential data and business service revenues now comprise almost 55% of our total revenues and as Tom mentioned earlier, total revenues now quarter-to-quarter grew by 3.7%. Now getting in the detailed results, starting with revenues. Total revenues increased $7.3 million or 3.7%, due primarily to increases in residential data and business services revenues of $13.7 million and $3 million respectively. As a result of the customer mix shift towards these two products, which now comprises as I mentioned earlier 55% of our total revenues. These increases were partially offset by decreases in residential video and residential voice revenues of $7.4 million and $1.5 million respectively. The declines in residential video and residential voice revenues were primarily attributable to residential video customer losses of 13.8% and residential voice customer losses of 12.8% for the 12 months ended September 30, 2016. Residential data service revenues increased $13.7 million or 18.8%, due primarily to a rate increase taken in the fourth of 2015, an increase in residential data customers of 1.9% for the 12 months ended September 30, 2016, a reduction in package discounting and increased subscriptions to premium tiers by residential customers. Residential video service revenues declined $7.4 million or 9.1%, due primarily to residential video customer losses of 13.8% and partially offset by a broadcast television surcharge imposed in the second quarter of 2016. Residential voice service revenues decreased $1.5 million or 12.3%, due primarily to a decline in residential voice customers of 12.8% for the 12 months ended September 30 as more residential customers have discontinued landline voice service. Business service revenues increased $3 million, or 13.2% due primarily to growth in our business data and voice services to both small and medium-sized businesses and enterprise customers. Total business customer relationships increased 9.6% for the 12 months ended. Overall, business services comprised 12.4% of our total revenue for the third quarter of 2016, compared to 11.3% of our total revenues for the third quarter of 2015. Advertising sales revenues declined $0.8 million or 11.2%, due primarily to the negative impact of decreased video customers on the number of viewers available to be reached by advertising spots. Turning to our operating costs and expenses, operating expenses increased $1.4 million or 1.9%, due primarily to a $2.9 million increase in non- programming operating expenses, partially offset by a $1.5 million decrease in programming costs, which primarily resulted from a 13.8% reduction in residential video customers. The increase in non-programming operating expenses was primarily attributable to increases in the net impact of changes in capitalized and contract labor of $1.3 million, as the mix of plant related labor shifted to repair and maintenance activities, fixed asset disposals of 0.8 million increases in backbone and Internet connectivity fees of $0.6 million and software maintenance of 0.2 million. Operating expenses as a percentage of revenues were 37.3% and 38.0% for the three months ended September 30, 2016 and 2015, respectively. Selling, general and administrative expenses increased $1 million or 2.1%, due primarily to increases in equity and cash-based incentive compensation of $3.2 million. Acquisition -related costs of $2.5 million and advertising and marketing cost increases of $1.3 million. These were partially offset by decreases in salary, wages and benefit costs of $2.4 million due to decreased headcount and lower group insurance costs. They were also reduced by processing cost which are lower for our customer billing following the completion of our billing conversion of about $2.1 million and general insurance costs of $1.2 million. So now selling, general and administrative expenses as a percentage of revenues were 23.7% and 24.1% for the three months ended September 30, 2016 and '15, respectively. Other expense decreased $4.5 million, due primarily to a $4.2 million net gain on the sale of a cable system. Looking at provision for income taxes, provision for income taxes increased $7.9 million or 66.2%, due primarily to higher taxable income and certain pre-spin tax items recorded during the third quarter, including a $4.1 million adjustment related to pre-spin deferred taxes and other tax calculations. These adjustments are not material to our projected annual results and we do not expect similar adjustments in future quarters. The increase resulted in an effective tax rate for the quarter of 48.6% for the third quarter of 2016, compared to 38% for the same period last year. Adjusted EBITDA of $87.2 million increased by 12.6% and adjusted EBITDA less capital expenditures increased $13.4 million or 28.2%. For the quarter our conversion rate defined as adjusted EBITDA less CapEx as a percentage of adjusted EBITDA was approximately 70%. This is due to the 12.6% increase in adjusted EBITDA and the lower capital expenditures during the quarter. Turning to capital expenditures, capital expenditures totaled $26.3 million and $30 million in the third quarters of 2016 and 2015, respectively. This represents approximately 13% of revenue for the third of 2016. Meanwhile, year-to-date capital expenditures of $91.3 million represent about 15% of revenues. We continue to believe that capital expenditures as a percentage of revenue will be in the mid teens for the full year 2016. Turning to liquidity, during the nine months ended September 30, 2016, our cash and cash equivalents increased by $4.5 million and at September 30, 2016, we had approximately $124 million of cash on hand compared to $119 million at December 31, 2015. On share repurchases, we repurchased 18,629 shares at an aggregate cost of $9.6 million during the quarter and have repurchased a total of 164,532 shares through September 30, 2016 at an aggregate cost of $72.5 million. These repurchases represent approximately 2.9% of total shares. So in conclusion, our solid financial performance has continued through our third quarter, fueled by the continued growth of both residential data and business services. And with operator, we are now ready for questions.

[Operator Instructions] Our first question comes from Phil Cusick of JPMorgan. Please go ahead.

Hey, guys. Kevin, I apologize, you went through a lot there really fast. Can you say again what the buyback this quarter was?

Of shares, sorry…

Yes.

Hold on a second, 18,629 shares at a cost of $9.6 million.

Okay. And how should we think about the board's attitude right now, total leverage and capital return, I think I asked this question last quarter. But it seems like you're not going back – buyback back at the pace you could, given the cash flow and leverage, what else is the company thinking about doing?

Go ahead, Tom…

We set a record, we were looking at good M&A opportunities that would be our first preference, organic or inorganic. We're examining a lot of folks. We'll continue to use share repurchases, okay, if we fit as it does benefit the shareholder based on conditions each quarter, but we don’t feel compelled to either on any specific time Phil.

Okay. And I know there is one small cable company out there for sale this quarter, did you look at that, was there an issue with price, because of someone else?

I am not going to make any comments on M&A, sorry.

Okay. And you didn't take a price increase, like last October, as you pointed out, should we assume the prices are stable for a while here?

I am not going to tell you when we'll take our next, where we took five years to take the last one, we've taken only one six years. So it’s a little bigger than usual, but we're not going to at this point say what our plans are for 2017 because we've not told customers.

Understood. And where are we on the high-speed data rate increase up-tick, are we pretty well fully baked in the third quarters or is there still more to roll in?

It should have been effective about the middle, we have four billing cycles. My understanding is that its halfway through October, is probably when we'll see effective.

That's correct. So I would have taken out effectively on our cycle billing the middle of the - of October of last year would have been the full effect of it.

Got it. Okay. Thanks, guys.

Thank you.

Our next question comes from Craig Moffett of MoffettNathanson. Please go ahead.

Hi. If we could just stay with the topic raised about the price increase. So how do we think about the absence of the significant uplift in HSD pricing that we've had over the last 12 months. How do we think about the near term revenue trajectories of the business, just over - really over the next two quarters if I think about the lapping and kind of anniversarying the price increase?

Craig, we're not obviously going to give exclusive guidance, but we can tell you the numbers that are - in the past quarter the percentages were up about 18% in HSD - residential HSD, we did take a 10% rate increase across all HSD customer last year. We have you know, these are round numbers, 2% volume. So that leaves something like 6%, which is a combination of tier premiums and reduce discounting. So obviously the timing of rate increase and the size of our subscriber growth rate, that I mentioned, so you can just use that to do your math as best you can.

It is there any offset of - as you start to move to higher speeds, do you expect have faster uptiering in your customer base for - as you move toward the 100 megabit per second offering?

Well, that’s been out there for a year now, so – so I think that was September a year ago that we doubled our speed, so that would already be baked in.

So no real change in that trajectory then?

Well, again – it’s been fourth quarter since we doubled the speed, so if you can go back and look for third quarter, fourth quarter last year to see if there was change. I don't have it in front of me, I mean, you could look that up. So no that I would have done it, only do for that reason, but that’s when you would have seen it between third and fourth quarter of last year if there was a change.

Got it…

That’s coincided with a rate increase, so that sort of would be difficult to tease out I guess.

Understood. And then if I could just ask one more question, have you seen any change in the posture of your programming partners over the last 12 months, as you in your negotiations and conversations for renewal, given the strategy that you’ve taken with respective to video?

Well, we buy most of our program through the FTC, so we're negotiating directly for too much of it, and to my knowledge that I don't have perfect knowledge on this no, on those that we buy directly.

Great. Thank you.

Our next question comes from Stephan Bisson of Wells Fargo. Please go ahead.

Good morning. A couple if I may. The first on the merger – not the merger, on the acquisition -related costs, is that something we should be thinking of as recurring at all or is it kind of be a one-off as things come along to look at?

Kevin…

It’s not recurring. Yes, let me take that. Stephan, this is Kevin. It's not a recurring cost. They happen from time to time, as we've already mentioned, we don't comment on specific M&A opportunities or expenses. But we're continually evaluating potential targets using a disciplined and patient approach, but it was recurring, we wouldn’t have made an adjustment for it.

Got it. And then it looks like sequentially SG&A was up even excluding that expense, are we kind of at a pivot point, you had mentioned a lot of the comparability difference, but is this kind of a more standard run rate to think about going forward?

No, I think it's a quarter-to-quarter thing. I mean, we had some additional marketing in the quarter. We had some additional equity and cash-based compensation in the quarter and obviously as we already discussed, we have the $2.5 million of acquisition -related costs. So there are some unusual things in the quarter and the quarters vary, there are not all going to be the same. I think we're still on a good trajectory. As Tom mentioned, and I think we both mentioned, we have significant reductions in headcount that cause salary, wages and benefits to be down $2.4 million. So I think we're still headed in the right direction. We're very frugal and cost-conscious and there are certain items within the quarter that caused the quarter to be up on the SG&A.

Got it. That’s all from me. Thanks so much.

[Operator Instructions] Our next question is a follow up from Phil Cusick [JPMorgan]. Please go ahead.

Hey, guys, thanks. Can you just expand on the better video numbers this quarter? How much of that was driven by lower churn and how much by improvements in gross ads?

I don’t have that data in front of me, we don’t publish our churn data…

Maybe just qualitatively, if you can?

What I've said in the past directionally is we implemented the harvest video strategy four years ago, we took a lot of very big steps. They caused some precipitous declines which was okay with our strategy, like dropping Viacom, like dropping an entire door-to-door sales force in October 2013, I believe. We focus on 9% of our starts. They went away in one day. So we've take a couple of larger increases because we were certainly increase because we were sort behind the programming cost curve. So we have those big shocks and are no longer happening and I would, I feel that is – that the absence of those size of shocks are the reason for the changes in the trajectory.

Okay. And then I misspoke earlier, I asked about data ARPU, but I mean to ask about video ARPU, is that – should we assume this sort of the half of the price increase from the second quarter is now reflected in the third quarter numbers or is it fully in?

It’s fully in, Phil.

Okay.

It was a $4.90 increase back in the first part of June, so it's fully in the price.

Understood. Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Thomas Mike for any closing remarks.

Thank you. And thank all of you for following Cable One. The Cable One team, not just Kevin and I are proud of our success as standalone public company and so happy that our associates continue to embrace the very unique Cable One way. We just finished by coincidence our annual associate attitude survey which I've been doing for 20 years and never been more pumped up in my 24 years of running Cable One. So thanks to all of you out there listening and to our associates. And thank you and we will speak to all of you next quarter.

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