Cable One, Inc. Q1 FY2024 Earnings Call

Hello, and thank you for being here. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Cable One First Quarter 2024 Earnings Conference Call. I will now turn the conference over to Vice President of Investor Relations, Jordan Morkert. Please proceed.

Good afternoon, and welcome to Cable One's First Quarter 2024 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, including statements regarding future customer growth changes in ARPU, financial performance, capital allocation, dividend policy, leverage ratios and financing plans. 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 and today's earnings release and in our SEC filings, including our annual report on Form 10-K. 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 or GAAP. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. Reconciliations of non-GAAP financial as discussed on this call to the most directly comparable GAAP measures can be found in our earnings release on our website at ir.cableone.net. Joining me on today's call is our President and CEO, Julie Laulis; and Todd Koetje, our CFO. With that, let me turn the call over to Julie.

Thank you, Jordan, and good afternoon, everyone. We appreciate you joining us for today's call. Our first quarter results reflect continued momentum in residential broadband customer growth, sustained free cash flow growth, and the early proof of our focused efforts aimed at attracting a new cohort of customers. The initial results of this approach lead us to believe that we are on the right strategic path to create additional value in the future. Today, before turning the call over to Todd for a full review of our financial performance, I'm going to touch on three main topics. One, I'll discuss residential broadband growth, both our historical approach and the current marketplace as well as factors influencing our near-term performance that lay the foundation for sustained long-term growth. Two, our network, which serves as a fundamental driver of our growth and efficiency not only today but as a cornerstone of our future success. And three, the continued strong performance of our investment partnerships, including Mega Broadband. First, residential broadband service. Our past strategy focusing on high lifetime value customers enabled us to streamline operations and marketing efforts leading to tremendous growth of HSD revenues, EBITDA, and free cash flow by attracting a higher ARPU customer, albeit at a lower overall penetration level. We are now navigating a marketplace characterized by low move activity, the emergence of new fixed wireless competitors targeting value-conscious customers, a segment we had not previously targeted, and a rise in additional fiber competitors in select markets. Growth is essential for any successful business. At CABO, we are using multiple levers to help us achieve it. Unlike most of our peers, Cable One grew its residential subscriber base this quarter, adding approximately 6,900 new customers sequentially. Since the fall of 2023, our focus on expanding market penetration has yielded tangible results, even amid increasing competition. Our approach has led to both an increase in connects, and a further reduction in churn, demonstrating not only our resilience against competitive pressures but also high levels of customer satisfaction. Moreover, our substantial network capacity and growing percentage of self-installations allow us to onboard these new customers more efficiently and profitably. Our competitive strategy extends beyond price. For example, as we deploy our wall-to-wall WiFi solution across our footprint, we gain substantial insight into our customers' end-to-end service experience. Based on these insights, our internal engineers developed a platform that enables us to monitor external network interference, power levels, and other potential technical concerns allowing us to proactively identify and address potential issues or necessary enhancements. This capability to assess problematic areas has empowered us to target our efforts prioritizing our resources where they'll have the greatest positive impact on customer experience. By responding aggressively to certain competitors and retooling our go-to-market approaches to protect our customer base and attract new value customer segments, we have grown customers for eight straight months and turned customer growth trends in our favor in some of our most competitive markets. We are encouraged by these results, and now with this work behind us, our sights are set on trialing different tactics defending against new competitors on an as-needed basis. We believe that expanding our market share and growing customers ultimately sets us up for positive financial performance over the long term. While ARPU this quarter declined as expected, we believe this decline will improve as we round the corner on the activities I just described. We are confident in our trajectory moving forward. Now shifting to our network, I'll delve into our ability to deliver the next generation of speed and service offerings alongside our ongoing investments to enhance service delivery. We are proud to have invested more than $1 billion in our network infrastructure just over the last three years. These investments allow us to not only meet but to anticipate and exceed our customers' evolving needs for superior reliability and performance. This strategic focus includes enhancing reliability within homes and across individual devices where a large majority of customer issues occur regardless of whether the service is delivered via fiber or HFC. As a result, we have seen a notable improvement in customer satisfaction. We continue to invest in our network so that we can roll out DOCSIS 4.0 and 10 gigabit speed offerings and stay well ahead of the customer data demand which continues to grow at an extraordinary rate. In fact, our customers' monthly average usage has more than tripled over the prior years. Despite this growth, our network maintained a stable utilization rate of around 20% for both downstream and upstream traffic during peak hours this quarter. This proactive investment mindset to build excess network capacity positions us to optimize capital spending, supporting both superior net performance and sustained free cash flow growth. Over the past year, we've been directing investments into software platforms that serve as catalysts for digital transformation. These platforms are reshaping our operations and enhancing the customer experience by enabling advanced automation and making our service delivery more efficient. One such example is the consolidation of our current billing technology onto a single platform. Work is currently underway on this significant milestone, and we plan to have it completed within the next 12 months. This will streamline operations for associates and customers while expediting product launches and enabling us to go to market as one Sparklight brand. This process will also allow us to retire more than 30 disparate software platforms across our brands, drastically simplifying our technological infrastructure which we expect to result in several million dollars of annual savings. Turning to our investment partnerships. Today, we posted some additional information regarding the companies we have invested in on our Investor Relations website. The aggregate fourth-quarter annualized 2023 adjusted EBITDA of select companies in our investment portfolio was $613 million. This represents a growth of 24% when compared to the annualized fourth quarter 2022 adjusted EBITDA of these companies. Additionally, these companies collectively grew broadband subscribers by 11% and added over 330,000 new fiber passings during 2023. Continuing this positive trend into the first quarter, their total number of residential and business data customers increased by roughly 20,600 or 2.5% sequentially. It's important to note that these figures do not include the operations of Metronet in which our investment is relatively small. This performance underscores the effective execution by the seasoned management teams we chose to partner with and why we believe in the substantial value and potential future growth of these companies. We are also asked about the future of our investment in Mega Broadband Investments, also known as MBI, and the potential for us to acquire the remaining 55% stake in the company. Let me explain why we believe MBI is a great partner for us. First, they are performing well financially with annualized Q4 2023 revenues of approximately $320 million and a double-digit EBITDA growth rate when comparing LQA Q4 2022 to LQA Q4 2023, thanks in part to continued growth in both broadband customers and ARPU. They also have a loyal customer base of approximately 230,000 residential and business broadband customers in a network that covers about 665,000 passings as of December 31, 2023. Finally, and very importantly, we have a strong management team that shares our vision and values. If we do acquire the remaining stake in MBI, we are confident in our ability to efficiently integrate them, gaining cost and tax efficiencies. Our active participation on their board coupled with a robust network and a shared culture of delivering high-quality service to customers underpins this confidence. In sum, we continue to value MBI for all the reasons that first drew us to them. Their strong growth and less competitive rural market, impressive potential for future growth, and exceptional leadership team. To sum up, our performance in the first quarter of 2024 aligns with our long-term objectives, reflecting residential broadband customer growth and the benefits of past capital investments we have made in our network, allowing us to continue to generate strong free cash flow. With confidence in our strategic direction and the capability of our team, we are poised to sustain this momentum and realize our objectives for the remainder of this year. Looking ahead, we are focused on leveraging these achievements to drive sustainable EBITDA and revenue growth over the long term. And now, Todd, who will provide a recap of our first quarter financial performance.

Thanks, Julie. Starting off with revenues. For the first quarter of 2024, our total revenues were $404.3 million compared to $421.9 million in the first quarter of 2023. This decline is primarily driven by losses in video subscribers as we continue to navigate the final phase of our video product life cycle. Year-over-year, residential video revenues decreased to $9.9 million or 14.1%. Residential data revenues decreased $6.9 million or 2.8% year-over-year, driven by a 2.7% decrease in average revenue per unit. However, as Julie noted, residential data subscribers grew by 6,900 sequentially, expanding on the growth experienced in the fourth quarter of last year. On the business services side, starting this quarter, we are now breaking out data revenues separately given this product's very different growth profile as compared to business video and voice services. For the first quarter of 2024, business data revenues grew by over $2 million or 3.7% compared to Q1 of 2023. Operating expenses were $106.5 million or 26.3% of revenues in the first quarter of 2024 compared to $112.2 million or 26.6% of revenues in the prior year quarter, a 30 basis point improvement driven largely by a $9.2 million decrease in programming costs. Selling, general and administrative expenses were $90.4 million for the first quarter of 2024 compared to $86.7 million in the prior year quarter. SG&A as a percentage of revenue was 22.4% for Q1 of 2024 compared to 20.6% for Q1 of 2023, with the increase driven by additional investments in marketing to attract the new value segments and platform enhancements facilitating digital transformation. Net income was $47.3 million for the first quarter of 2024 compared to $57.4 million in the first quarter of 2023. The prior year quarter benefited from a $12.3 million noncash mark-to-market gain on one of our equity investments. Adjusted EBITDA was $217.1 million for Q1 2024, representing a 53.7% margin compared to $228.8 million, a 54.2% margin in the year-ago quarter as residential data subscriber growth was outpaced by continued attrition in our video business, a decrease in residential data ARPU and the aforementioned incremental costs associated with long-term investments in customer growth platforms. Capital expenditures of $65.9 million in Q1 were $30.2 million or 31.4% lower than in Q1 of last year. During the quarter, we invested $15.9 million of CapEx for new expansion projects and $4.4 million for integration activities. The reduced level of capital expenditures during Q1 was largely due to the execution of our working capital optimization initiatives and a continued benefit associated with prior proactive investments in our network architecture. We continue to expect total CapEx for the year to trend towards below $300 million for the full year. Adjusted EBITDA less capital expenditures increased $18.5 million or 13.9% to $151.2 million in the first quarter of 2024. We will continuously assess the optimal allocation of the significant cash flow generated by our business, maintaining a highly disciplined commitment to long-term investment strategies and conservative financial management. Our focus remains in four key areas: enhancing network and platform infrastructure, capitalizing on organic growth opportunities within our existing markets, strategic inorganic growth strategies, both investments and through acquisitions, and a diversified capital return strategy, which predominantly entails regular dividends, disciplined debt repayment, and opportunistic share repurchases. In Q1, we distributed $16.8 million in dividends to shareholders and repaid $54.8 million of debt of which $50 million represented voluntary repayments on our outstanding revolver balance. As of March 31, we had approximately $211 million of cash and cash equivalents on hand. Our debt balance was approximately $3.6 billion, consisting of approximately $1.8 billion in term loans, $920 million in convertible notes, $650 million unsecured notes, $288 million of revolver borrowings, and $5 million of finance lease liabilities. We also had $712 million available for additional borrowings under our $1 billion committed revolving credit facility as of March 31. Earlier this week, we voluntarily repaid an additional $50 million of debt under our revolving credit facility, continuing our commitment to disciplined debt reduction. Our weighted average cost of debt for the first quarter of 2024 was 4.25%. Our net leverage ratio on a last quarter annualized basis was 3.9x and the large majority of our borrowings are either fixed issuance or have been synthetically fixed at underlying base rates that are approximately half of the prevailing floating rates. Additionally, the nearest final maturity for any of our debt instruments are $575 million of 0.0% convertible notes does not occur until 2026. We are confident in our ability to maintain our leverage within a target range of 2.5 to 4.5x, should we acquire MBI via the put option. Additionally, given the available capacity under our revolving credit agreement, the consistent free cash flow generation from both companies and the portability of existing MBI credit facilities, we believe that we are well prepared to potentially complete the transaction without accessing the market for additional incremental capital. However, we will remain opportunistic in evaluating attractive windows in the capital markets. Before we open the floor to questions, I'd like to share an update on the affordable connectivity program, ACP. Despite the requirement to stop adding new ACP customers after February 7 due to the program's wind down, we achieved growth in overall residential broadband subscribers each month this quarter. It's important to note that among our roughly 48,000 ACP subscribers, approximately 20% are fully dependent on ACP funding for their service plans. Although we anticipate some customer losses, this transition also offers an opportunity to attract new customers.

Our first question will come from Sebastiano Petti with JPMorgan.

I have a quick housekeeping question, Julie, about your comments regarding the expectation that ARPU declines will improve once you reach a certain point. Are you indicating that this improvement will coincide with the effects of the fourth quarter? Could you clarify your timeline on this? I apologize for the question. Additionally, regarding residential broadband ARPU, how should we view the potential dilutive effects of the new strategy and its implications for broadband ARPU as we progress through the year? I believe we'll eventually see a rebound, but are there any risks you're considering for the existing customer base? You also mentioned in your prepared remarks that you might be ready to test new offers or target new competitors. Any further details on that would be appreciated.

Okay. That was a lot to cover. I will address your question step by step. Regarding ARPU improvements, I'm speaking about the changes we implemented in the fall of 2023. Historically, we have focused on attracting high lifetime value customers, which resulted in lower penetration compared to our competitors but higher ARPU overall. The competitive landscape has shifted, with new entrants in both wired and wireless markets. Therefore, in fall 2023, we adopted a more aggressive approach against certain competitors and diversified our marketing strategies to target all customer segments, rather than just high-value ones. The rationale behind this shift is straightforward: having a diverse customer base is essential for business sustainability. Additionally, advancements in technology and tools, including machine learning, allow us to maintain margin and value even with more price-sensitive customers. In response to competition, we experimented with various promotional and retention strategies. While our ARPU decreased, we gained valuable insights into which tactics were effective. We feel positive about our growth despite increased competition and are seeing progress across all segments. For example, we are outperforming DSL and fiber competitors. This growth is promising and gives us confidence in our strategy. Regarding ARPU, I often think of it like balancing on a seesaw, and we recognized our adjustments would cause some fluctuation. The key now is to apply the insights we've gained to improve. In the fourth quarter and the first quarter, you’ve seen the impact of these strategies. We now have a clearer understanding of what works and plan to implement those learnings. There are various factors affecting ARPU; year over year, the most significant drop in ARPU is due to responding to competitive pressures in some markets. However, there's a positive trend with customers moving to higher-tier packages willingly, although we slowed this with changes like removing usage-based billing and eliminating unlimited data. Nonetheless, I see this positively, as these premium services typically lead to higher ARPU. Additionally, we have made rate adjustments that positively influence year-over-year comparisons, although promotions and lower rates challenge this. Both factors can evolve into advantages over time as promotions expire and we adjust prices. I hope this gives you a clearer picture of ARPU. As for future trials, we are committed to ongoing experimentation and innovation. I take great pride in our team's agile mindset and our ability to respond quickly and creatively to new opportunities to ultimately provide our customers with the best products, pricing, and overall experience.

Your next question comes from the line of Brandon Nispel with KeyBanc Capital Markets.

I'm going to ask a related question. Julie, how do you view what you're doing from a go-to-market perspective? Is there an economic relationship between ARPUs and penetration? In a hypothetical situation where your ARPUs decrease to $70 to $75 a month, what can investors anticipate regarding your penetration rates? Additionally, you mentioned that you've been growing subscribers for eight consecutive months. Are you noticing any acceleration in those trends due to your go-to-market strategies?

The first quarter was stronger than the fourth quarter, largely due to our performance in connects and churn. Churn has been a focus for some time, and our rates are exceptionally low, having halved in highly competitive markets, which indicates that our strategies are effective. Regarding connects, we experienced increases ranging from single-digit to double-digit percentages during the first quarter, something we haven't seen since 2020. Moving on to penetration rates, while we haven't disclosed a specific target, it seems reasonable to expect our rates to align somewhat with those of our larger competitors, though there will be differences due to our unique market demographics.

Hi, Brandon. This is Todd, as we've shared about in the past and discussed broadly at 35% now versus many of the peer group in the high 40s, low 50s, getting that extra percentage point of penetration is going to be much more achievable. For us, especially with some of these new tactics and strategies, closing that gap completely is not what we have talked about.

Yes. Sure. So I guess, again, the question is if you expect to close the gap, at what ARPU level do you expect to be at when you are closing the gap?

Well, I think that's a great question. I mean, again, if we use the seesaw analogy, while our penetration is going up and our ARPUs tilting down, their ARPU is going up, all their penetration is tilting down. And somewhere, we're all going to meet. You can tell me where you think that is. I think it's for any of us to guess.

Recall also that our ARPU that we're looking at is a data-only ARPU for the vast majority of everything you look at. So important element to think about as you look at comparing the benchmarks, if you will.

But I think what we're trying to suggest without giving too much leading guidance because none of us has a crystal ball, but we've taken some big steps and we expect to see the ARPU slide improve.

Your next question will come from the line of Greg Williams with TD Cowen.

I'll take the subscriber question another way, too. So you mentioned you're poised for sustained momentum here. So you're the only cable company that provided positive subs this quarter. So have we reached a steady state, you think now of positive subscriber growth, absent the ACP next quarter? And second question is on EBITDA. Todd, can you remind me if there's any first quarter seasonal impacts and how much they were? And you mentioned the OpEx cost for systems and platforms, and you're retiring 30 different systems. Can you give us some help on how much that would cost sort of upfront and then when you realize these millions in savings that you alluded to, when will that realization occur?

Sustained momentum. It certainly feels that way. Honestly, my hope is that our team is adopting the same mindset as the cable team, focusing on continuous improvement and embracing an agile approach with more experimentation. We have discovered effective strategies that we haven't tried yet. Therefore, I believe we have strong momentum moving forward. As you noted, I wouldn't set any limits on it, yes.

And Greg, as it relates to the seasonality question on EBITDA, I wouldn't look at that as something that would be a meaningful impact to Q1. I think you appropriately asked about the investments in these long-term platforms and the cost of those investments as we've discussed now for a couple of quarters, those costs are going to impact in 2024 as it relates to both OpEx and some SG&A, but these are long-term investments and overall efficiencies in terms of how we deliver the product, how we support the product, how we create a better customer experience and how we create a better associate experience. And we referred to several million dollars in our prepared remarks on the back end of that. And there is an investment and investment that we think is critical to make this year.

And that was related to just the billing platform implementation.

Your next question will come from the line of Frank Louthan with Raymond James.

Great. As you've been growing those customers, can you give us a sense, is that coming from improving the gross adds or is it a little bit of less affection or how should we think about that? And we can kind of back into the math, but if you want to give us some color on what the range of the multiples are with the put for MBI?

We have increased our customer base by enhancing our connections and lowering churn rates. The growth in connections ranges from high single digits to mid-double digits, a level we haven't experienced since 2020, and our churn is currently at its lowest ever, particularly in markets where we have actively addressed competitive pressures.

And then Frank, on the MBI front, I guess, Julie added definitely some additional commentary in her remarks. I would say the most important thing as it relates to that is, its performance trends are extremely impressive. Where it is from a network perspective is highly aligned with us where it is from a leadership and cultural perspective, checks every box that we look at as it relates to ongoing investments in partners, both investments as well as acquisitions. And we are very mindful of maintaining a very conservative balance sheet approach, both from a leverage perimeter and also how we think about funding prospective transactions like that. And I think you heard me mention that we see a path to where we do not have to go to the capital markets to affect that transaction, given all the proactive planning that we've been doing now for the last two years.

Your next question will come from the line of Steven Cahall with Wells Fargo.

I wanted to maybe come at the subscriber trends from a slightly different direction. So I understand your strategy of targeting more of the value-conscious consumer, and thank you for talking through that a bit and the implications on ARPU going forward. I think the bit that I'm trying to understand is that it looked like residential data revenue was down sequentially about 3%. It was down, I think, year-on-year, about 3% as well. I think a lot of that has to do with the competition that you're facing and seeing lower ARPU on existing subs despite all those other trends. So because it's such a high gross margin business, how do we think about when your residential revenue for broadband might start to stabilize versus continuing to decline? And then as a follow-up, Todd, I was wondering if you mentioned how many net adds you had in Q1 from ACP, I think you mentioned you were adding subs up until April. So just curious if that was a meaningful number.

I can let Julie maybe go about the value-conscious customers, then I can address the ACP.

Yes, residential data revenue decreased due to a decline in average revenue per user. This decline was influenced by several factors I mentioned earlier, with the primary one being competitive pressure in a few systems. Additionally, while initiatives like migrations, which positively impact revenue, were somewhat countered by the inclusion of previously extra-cost items such as usage-based billing and unlimited data, as well as rate card adjustments. These adjustments can also positively contribute to revenue but are offset by increased promotions and rates aimed at value-conscious consumers. The latter is just a minor factor in the overall decline of ARPU. As for your question about when we expect residential revenues to stabilize, we haven't provided specific guidance on revenue or adjusted EBITDA since going public. However, we anticipate a year of positive free cash flow and believe our current strategies will position us for growth in revenue and adjusted EBITDA in the future.

ACP, we only did ACP installs until February 7. Yes, that's exactly right, Steven. February 7 was the day that we were mandated to stop, and we had basically started to pull on that already before that point in time. And so the comment around every single month of this quarter was a positive subscriber add on a net basis was included after February 7. So we didn't break down what was ACP net adds for January and the first seven days of February, but suffice to say, we weren't really impressing on something that we already knew was going to be going away.

Well, and even if I exclude any ACP customers that came in, in the first quarter, our connects were up substantially. So they're not on the back of ACP. My guess would be, and it would only be a guess because I can't quantify it, is that the connects are likely coming from competitors like, we're getting connects that normally might go to fixed wireless, as we're focusing on that segment which is the value-conscious segment.

And your next question will come from Kohulan Paramaguru with BNP Paribas.

I've got two questions. Firstly, on the ARPU. Can you give us a little bit more color on what ARPU those growth adds are actually coming in on? If we do some rough math, it indicates if these offers are the reason for the ARPU decline, it would imply sort of a sub-$50 ARPU. Just trying to think about if this is value accretive to the business or how should we think about this in the long run? And secondly, around MBI, does your comment around not necessarily needing to come to the capital markets for the deal include an assumed drawdown on the RCF?

Yes. Good questions. I'll address both. Julie can jump in on the ARPU and the value-accretive side of the equation. It's a great question as you're selling in at a lower price point to a new customer, one of the critical things to assess is how long-term accretive is that customer. And when you have 80% capacity in your network because of the way that we've invested in our network, and you have organizational capacity, many of these customers coming in markets that we already served with that network, the way that we can deliver the product from a cost to install Julie referred to in her prepared remarks around self-installs as well as the way that we can support that product and that customer with a lot lower CPX, the value-accretive nature of that new customer, even at those lower price points, even if they never upgraded is accretive. And then you've got to look at the fact that over time, that is a customer that is likely to upgrade as both self-intentioned price upgrades as well as where we can potentially see some of these promo prices roll off that Julie alluded to. But that's a critical part of that because customers for the sake of having customers has never been part of our strategy. The other element you asked about related to MBI is, yes, what we have committed in terms of our $1 billion credit facility, what we generate from free cash flow, what MBI has committed does not necessitate any change of control if it were to come into CABO and their free cash flow is what informs my remarks. Is that helpful?

Yes. Thank you.

We have no further questions at this time. I'll turn the call back over to Julie Laulis for closing remarks.

Thank you, Regina. As we wrap up today's call, I want to focus on what truly powers our success at Cable One, and that is the dedication and hard work of our people. While today's discussion centered on topics that our shareholders frequently inquire about, it's important to remember that it's our associates who turn these plans into reality. They are indeed our most valuable asset. So to each of our team members, thank you for your relentless effort and commitment. Additionally, for those interested, Todd and Jordan will represent Cable One later this month at the upcoming JPMorgan conference in Boston, and we all know how much fun they are, so come and see them. Thanks and speak to you again next quarter.

That does conclude today's call. We thank you all for joining. You may now disconnect.