Cable One, Inc. (NYSE:CABO) Q1 2024 Earnings Call Transcript May 4, 2024
Cable One, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Vice President of Investor Relations, Jordan Morkert. Please go ahead.
Jordan Morkert: 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 measures 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 [ph] Laulis; and Todd Koetje, our CFO.
With that, let me turn the call over to Julie.
Julia Laulis: 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. And 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 at mixed 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 gained 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 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 vent [ph] 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 sites 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 ameliorate 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 with 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 in 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 growth of 24% when compared to annualized fourth quarter 2022 adjusted EBITDA of these companies. Additionally, these companies collectively grew broadband subscribers by 11% and added over the 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 value. 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 condition 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.
Todd Koetje: 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 non-cash 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 a voluntary repayments on our outstanding revolver balance. As of March 31st, 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 3.9 times 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 4.5 times, 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 7th due to the programs 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. With that, we are now ready for questions.
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