Cable One, Inc. (CABO) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Cable One Earnings Report Q2 2020 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steven Cochran, Chief Financial Officer. Please go ahead, Mr. Cochran.

Thank you, Lexi. Good afternoon, and welcome to Cable One's second quarter 2020 earnings call. We appreciate you joining us today. 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 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 on today's call is our President and CEO, Julia Laulis. With that, let me turn the call over to Julie.

Thank you, Steven. Good afternoon. I want to thank everyone for joining us for our second quarter earnings call. Before discussing the quarter, I want to welcome our new associates from ValueNet, an all-fiber Internet service provider operating in Kansas. This transaction closed on July 1, and we are very excited to have ValueNet join the Cable One family of brands. We will begin to see them in our financial results starting in the third quarter. In addition to ValueNet, we completed a few other investments since we last spoke with you, which Steven will highlight later in the call. Our second quarter results epitomize the resiliency of our business model, especially in the face of times of uncertainty, like we are seeing now. For the health and safety of our associates and communities, we made deliberate choices that resulted in us foregoing revenues and increasing costs. Even with those negative elements impacting results, we grew our quarter-over-quarter revenues by 14.9% and our adjusted EBITDA by 18.6%, while increasing our adjusted EBITDA margin 150 basis points to 49.7%. To meet the increased demand from new residential data customers, we focused our efforts on completing HSD-only connect for most of the second quarter. We added more than 44,000 residential HSD customers since the end of the first quarter of 2020, which excluded approximately 2,000 new customers who never paid us and are at high risk for disconnections, and our year-over-year growth increased to 23.7%. The health crisis has reinforced the need for reliable, value-priced and flexible HSD service. And we believe that, as a result of years of investment and the commitment of our associates, our business was well positioned to handle the increased demand. Meanwhile, our video losses accelerated slightly in the quarter, a trend that we recognized and adapted, too, many years ago. Our strategic shift to an HSD and business services-centric model has enabled a steady transition away from the video product and is reflected in our relatively low exposure today. On the business services side, we saw continued revenue growth with quarter-over-quarter increases of 17.5%. While the pandemic has caused some pressure on both existing and new sales to small business customers, it has also presented opportunities, primarily among larger and enterprise businesses where the need for superior communications technology has increased. During the second quarter, we increased the maximum speed of our corona fiber offering for small and medium businesses from 2 gig to 5 gig symmetrical, and we continue to expand our EPON offering to additional markets. Throughout the quarter, the number of business services subscribers that restarted or upgraded services outpaced the approximately 630 customers, representing less than 1% of our customer base that paused or downgraded their services. We will continue to invest in products that fit our customers' growing needs and work closely with small business owners who have been adversely impacted by the crisis. There are still many unknowns when considering the trajectory of the pandemic and its cascading impacts on the economy, our associates and our customers. COVID-19 and our associated responses once again caused us to forgo some revenue and increase certain expenses, negatively impacting adjusted EBITDA by nearly $15 million in the second quarter, but that was mostly offset by our residential HSD growth and reduced expenses in some other areas. Data usage during the second quarter increased more than 52% year-over-year and over 13% sequentially to roughly 440 gigabits per month. We noted last quarter that we were evaluating our existing data plans, and we anticipated making adjustments based on that increased usage pattern. Those changes went into effect on July 1, 2020, when we revised the majority of our residential data plans to provide 50 to 300 gigabits of additional data, depending on the plan, at no additional charge. With these enhancements, we expect that the vast majority of our residential customers will continue to stay within their data plans. Our network remains well ahead of the consumption curve with peak usage averaging less than 25% for downstream traffic and less than 17% for upstream traffic as of the end of the second quarter. We remain steadfast in supporting our customers and communities in need during the COVID-19 pandemic. Earlier this summer, we announced our extension through the end of the year of many of the relief measures that we set in place during the first quarter as part of the FCC Keep Americans Connective Pledge, which ended on June 30. We are continuing to offer our 15 megabit residential HSD plan for $10 per month for the first three months of service through the end of this year. This is designed to help low-income families as well as those most impacted from coronavirus challenges. Additionally, we are extending access to nearly 140 free public WiFi hotspots across our footprint through the end of this year in order to keep individuals and communities connected during the crisis. Other measures include: working with residential and small business HSD and voice customers who have been harmed financially by the pandemic to keep them connected, including waving late fees through July 31, 2020, and offering flexible payment plans; partnering with communities, hospitals, medical centers and other essential institutions and addressing their unique broadband connection needs and challenges; and as I previously mentioned, permanently boosting the data capacity for a majority of our residential data plans. In keeping with our values, our associates continue to respond to the needs within our communities by providing meals for first responders and health care workers as well as donating time and resources to local food banks and nonprofits during this critical time. For the seventh year in a row, we donated hundreds of Chromebooks to title one schools across our footprint to help bridge the digital divide for students and schools with limited technology, and we recently gave more than $50,000 to K-12 schools in our markets for back-to-school supplies. I said this on our first quarter call, but it bears repeating. I am so very proud and humbled by our Cable One team. No matter what curve 2020 has thrown our associates, they have remained agile and responsive, never taking their eyes off the ball, while taking care of each other, our customers and our communities. Throughout the crisis, our primary focus has been on the health and safety of our associates and their families. In mid-March, we instituted multiple initiatives to protect our associates, so they, in turn, were able to provide outstanding service our customers have come to expect from us. This quarter reflects a full three months with our new operational procedures in place. This includes more than 90% of our corporate and call center associates successfully working from home at this time and for the foreseeable future. Associates and roles critical to operations who are unable to perform their jobs from home are following rigorous safety protocols and procedures based on federal, state and local health guidelines. In March, we also began providing purpose pay, a 25% premium to hourly base pay to those associates asked to leave their homes in support of completing our promise to connect our customers to what matters. Purpose pay will continue to be in place until early September, at which time we plan to wind down the program. Additionally, to reduce financial uncertainty and allow flexibility in caring for themselves or family members impacted by COVID-19, we enhanced our associate time-off programs to provide up to 80 hours of additional emergency paid time off. For associates in need of more time, emergency family leave provides an additional 10 weeks of job protected leave at two-third regular pay. These combined measures have proven critical in supporting our associates through an extremely difficult time, while still maintaining operations in order to keep our customers and communities connected. Our cross-functional incident management team has worked around the clock over the past several months to monitor and modify operations on a market-by-market basis and address the unique situations and conditions impacting our associates and communities as a result of this pandemic. In addition to keeping our associates well informed, the incident management team remains in constant contact with our leadership team, enabling us to make critical decisions and pivot quickly in this rapidly changing environment. After a brief pause due to the pandemic, our rebrand of NewWave Communications to Sparklight is back on track, with the vast majority of activities expected to be completed by year-end. Work to transition uniforms, trucks and signage is well underway, and we are excited to bring our NewWave associates and customers under the Sparklight umbrella. The integration of our Fidelity acquisition continues, including recently announced plant upgrades in Missouri and Arkansas in order to bring Fidelity up to Cable One levels of service. Additionally, we consolidated Sparklight and Fidelity Oklahoma operations under a common local management, which will not only allow for a more geographically efficient structure, but also let us continue to capitalize on best practices from both companies. As we mentioned last quarter, we are on a three-year time line to complete integration, and we were fortunate to have a long pre-closing period to prepare. That timetable, coupled with the knowledge and experience gained from prior integration projects, has resulted in us being ahead of schedule. And now Steven will discuss our second quarter results as well as our financial position, liquidity and leverage.

Thank you, Julie. The second quarter of 2020 produced strong financial results. Revenue for the second quarter were $328.3 million compared to $285.7 million in the prior year quarter, representing a 14.9% increase. This increase was fueled by a residential HSD revenue increase of 23.5% and a business services revenue increase of 17.5%. Excluding Fidelity operations, total revenues increased 3.3% year-over-year. Operating expenses were $106 million or 32.3% of revenues in the second quarter compared to $95.7 million or 33.5% of revenues in the prior year quarter, a 120 basis point improvement. Selling, general and administrative expenses were $65 million or 19.8% of revenues in the second quarter compared to $60.1 million or 21% of revenues in the prior year quarter, a 120 basis point improvement as well. This includes a significant increase in our bad debt reserve in Q2 to account for non-paying customers that were committed not to disconnect as part of the FCC's Keep Americans Connected Pledge. Net income in the second quarter was $62.5 million, and net income per share on a fully diluted basis was $10.63 per share. Adjusted EBITDA was $163.2 million for the second quarter and increased 18.6% from the prior year quarter. Our adjusted EBITDA margin increased 150 basis points year-over-year, going from 48.2% to 49.7%. Capital expenditures totaled $78.7 million for the second quarter of 2020, which equates to 48.2% of adjusted EBITDA and 24% of revenues. We attributed the majority of our sequential increase in capital expenditures to labor and materials, supporting elevated HSD installation and purchases to ensure we have adequate supply chain. In the second quarter of 2020, we paid $13.6 million in dividends to shareholders. As announced earlier this week, we increased the quarterly dividend by $0.25 to $2.50 per share. From a liquidity standpoint, we raised approximately $470 million in net proceeds in a public equity offering during the second quarter. A portion of the proceeds were used to repay our outstanding $100 million in revolver borrowings, and we expect to use the remainder for general corporate purposes, including acquisitions and strategic investments. We had approximately $643 million of cash on hand as of June 30, and we continue to generate significant free cash flow. At quarter end, our debt balance was approximately $1.7 billion consisting of term loans and finance lease liabilities, and we had $321.3 million of available for additional borrowings under our revolver. Overall, our debt to last quarter annualized adjusted EBITDA after netting cash on hand against debt was at 1.7 times, providing us with ample liquidity. Before taking questions, I'd like to give an update on our recent acquisition and investment activity. We've had a busy few months working on several smaller strategic transactions. As Julie mentioned earlier, we closed on the ValueNet acquisition on July 1. The base purchase price was $38.4 million. ValueNet generated approximately $8.4 million in revenues in 2019, and their operations will be reflected in our consolidated results starting with third quarter reporting. During the second quarter, we also entered into an agreement to purchase approximately 40% of Wisper ISP, a fixed wireless broadband company. Wisper was a significant winner in the Connect America Fund II auction, which I'll call CAF II for short, across six states currently served by Cable One. We partnered with Stephens Capital Partners and Nathan Stooke, Wisper's founder, who remains its largest owner. We closed this transaction in early July, so that the investment and our related pro rata share of earnings for the third quarter will also be reflected in our third quarter financials. Also during the second quarter, we acquired less than 10% interest in Nextlink Internet, another fixed wireless provider and CAF II winner. Nextlink operates in six states in which Cable One also provides service. Bill Baker, the founder, majority owner and CEO of the company, is our new partner and continues to run the day-to-day business. Given the ownership position, the investment has been reflected on our second quarter balance sheet add cost. We believe that fixed wireless is a great complement to our business in less-dense areas surrounding our markets. Through the CAF II program, both Wisper and Nextlink are expanding their networks in bringing broadband to unserved and underserved parts of America. Given our rural broadband focus, we feel that these companies are strategically aligned and will contribute to our value creation over time. Finally, earlier in July, it was announced that we entered into an agreement with Hargray Communications, whereby we will contribute our Anniston, Alabama system to Hargray for a minority equity interest in the company. Hargray will be able to use its regional scale to further invest in the Anniston market, an area of the country in which we currently have limited presence. Additionally, as a result of the transaction, we will share Hargray's growth, while increasing our opportunities for continued investments. We expect this transaction to close in the fall, pending certain regulatory approvals and other customary closing conditions. Given that our ownership interest will be less than 20%, we will be recording this investment at cost as well. As of June 30, 2020, Anniston had approximately 18,000 residential HSD customers and generated last quarter annualized revenue of approximately $38 million. We are looking forward to partnering with their management team led by CEO, Michael Gottdenker; and the investment partners at The Pritzker Organization, Stephens Capital Partners and Redwood Partners. We plan to continue to follow our balanced strategy to deploy cash and grow the business. As we've said before, that entails a combination of seeking broadband-related acquisitions and investments, opportunities in rural markets as well as capital projects intended to drive long-term growth. Lexi, we are now ready for questions.

[Operator Instructions] Your first question today comes from Greg Williams with Cowen. Please go ahead.

Great. Thanks for taking my questions. First one, just on ARPU. It looks like you posted solid ARPU gains across the board. I'm just trying to understand the sustainability of the ARPU strength. You mentioned a lot of customers taking faster speeds. But at the same time, on July 1, you guys changed your rate card a little bit to provide some extra data. And then my second question, you provided some good detail on the ValueNet and Hargray transactions. How should I think of them from an EBITDA perspective? Did they have similar margin profiles?

I'll jump in on the ARPU and let Steven take the ValueNet, Hargray question. You're exactly right, Greg. Our sell-in to higher levels of service, in the past, 100 meg was our standard service. That is no longer the case as we continue to sell in at higher levels. 70% or more of new customers coming on board are electing to get service at a higher than 100-meg level, and those are obviously at higher rates. Now during the Keep Americans Connected Pledge period, where it was pretty well known that we were not assessing any overage fees, so that was something that Cable One took on its own behalf as well as no disconnects, our sell-in for unlimited fell during that period, but the premium sell-in to higher tiers did not, so it continues to drive the ARPU up. Recall also that we did migrate NewWave customers on to our flex pricing and packaging, and so that was bringing NewWave's ARPU up closer to Cable One's historical ARPU. There is – shows no signs of slowing down, and I would expect that once we start having our overage fees in effect, the appeal of unlimited will go back up as well.

And then on the margin question, I mean, ValueNet, obviously, is a smaller operator, doesn't have as high as margins as we do, but they're very good for a company their size. Their margins were good. And so – and we would anticipate that, over time, with the scale and the areas where we can help them, that those margins will align nicely with Cable One's margins. On Anniston, we don't give system specific margins or even region-specific margins. But from a system standpoint, it looks a lot like the rest of the company.

Great, thank you.

Thank you.

We have reached our allocated time for the question-and-answer session. I would now like to turn the conference back over to Ms. Julie Laulis for any closing remarks.

Thank you, Lexi. Before ending the call, I would like to take a moment to welcome Sherrese Smith, the newest member of our Board of Directors. An experienced and highly regarded attorney who is very familiar with our industry, Sherrese is a valuable addition to our already exceptional Board, and we are eager to reap the benefits of her insight and acumen. In closing, I want to say thank you to each of our associates for continuing to live out our company's purpose during these turbulent times to provide communities the connectivity that riches – enriches their world is more important than ever, and I'm very grateful to be working alongside of all of you. Thank you.

Thank you, Ms. Laulis. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.