Q3 2022 Cable One Inc Earnings Call
<unk> trends.
Our residential Internet <unk> for the third quarter increased by two 5% year over year.
As discussed last quarter, we believe our ARP, who can grow at a faster pace in the future as customers continue to demonstrate their desire for higher speeds and data and we continue to explore and introduce value added services to our product offering.
In the third quarter, our selling four packages with the download speed of 300, megs or higher increased by over 500 basis points from approximately 59% of our total customers to 64%.
And gig sell in accelerated once again from 28% to nearly 32%.
Customer growth the continuing increase in data consumption and the demand for more robust Internet service all serve as a testament to the need for fast and reliable connectivity in our markets and a positive long term outlook.
Our results also demonstrate that we can continue to grow our residential broadband business, despite new entrants into the broadband category.
As of the end of third quarter, 33% of our markets had a wired competitor offering residential broadband download speeds of 100 megs or higher.
This represents a relatively low percentage of our overall footprint.
We have successfully overcome market competition throughout our company's history for context, we competed against DSL and essentially 100% of our footprint in the past.
Back then our products were at parity and we leveraged our local associates, our rural market Knowhow and work to improve our product offerings in order to grow.
My confidence in our ability to continue this type of growth over the long term continues today for the same reasons.
We will also continue to keep an eye on fixed wireless competitive activity, but adoption in our markets remains low.
While there is potential for near term disruption as we believe this could be a viable alternative for DSL and other lower quality technologies, we have already experienced customers returning to spark light for our premium reliable wired service.
Moving to business services when excluding the operations, we divested earlier this year and those are cable America, we experienced revenue growth of 5%.
While macroeconomic headwinds give some indications that there are some strains on small businesses. We feel our services are mission critical to the customers. We serve and are confident in delivering growth over the long term.
As mentioned earlier another constant in our business has been the growth in customer data usage. Our average data usage grew 19% from the same quarter of 2021, reaching a new high of just over 580 gigabits per month.
We now have nearly one out of every five customers using more than a terabyte of data on a monthly basis with downstream usage outpacing upstream at a ratio of over 15 to one.
At the same time, we've maintained significant capacity on our network with downstream and upstream utilization during peak hours never exceeding 22%.
A network I'd like to highlight over which more than 95% of our customer data travels on fiber.
Versus coax.
This continued growth in demand sets the stage for the enhanced service offerings, we are preparing to roll out at the beginning of next year and beyond.
Our residential customers, we have successfully tested multi keg download speeds and upload speeds that would be in excess of 10 times faster compared to our flagship speed tier.
As we roll out this next generation of service offerings, we do not anticipate any material increase in our annual capital expenditures. Since this investment has been part of our roadmap all along.
Related to our network, our longstanding pivot away from video to focus on high speed data and business services.
It's working to harvest linear video spectrum from our existing network through the launch of Internet protocol television.
And allocating the resulting capacity to the growing demand for our broadband services as.
As we go through this transition we anticipate a continuation of accelerated video losses.
Over the long term, we expect this effort to reduce our capital outlays for video services and enable us to continue to advance down our strategic path.
Transitioning to integration and deconsolidation activity this quarter, our teams made excellent progress on the integration activities underway across our multiple brands.
Most recently in October we partnered with a clear wave fiber team successfully migrated customers onto their own billing platform further empowering the clearway fiber management team to execute on their strategy of accelerating market expansion in new and existing markets.
To date, our fidelity acquisition has significantly exceeded our three year EBITDA targets with more upside as integration activities continue.
A reminder, due to the strong performance at fidelity and the large opportunity with hard grade we made the tactical decision to pivot our primary focus to the integration of hard grade Communications, which also continues to progress along our scheduled roadmap.
Switching gears, we continue to leverage technology and process improvements to further elevate our customer experience.
I'd like to highlight some ways in which we are seamlessly and more efficiently servicing our customers, including the recent launch of our automated field maintenance program and our automated truckload recommendation engine.
The automated field maintenance program monitors our plant and creates work orders prior to a customer experiencing an issue. This further improves the reliability of our service while driving efficient routing for our internal workforce, who are increasingly shifting from reactive to proactive maintenance of our network.
Our automated truckload recommendation engine is a unique machine learning system that analyzes cable modem signals to determine if a customer's device, it's not performing optimally and cannot be fixed via remote troubleshooting.
This new process enables our associates and customers to bypass time consuming steps in the process and move directly to an onsite technician.
These are just two examples the many transformative opportunities we will bring to market in the near future, making the lives of our customers and associates better and further enabling cable one to provide differentiated service and successfully compete over the long term.
Looking at our unconsolidated investments in total residential and business data customers grew by approximately 9200 or 2% on a sequential basis from Q2 of 2022.
This does not include the operations of Metronet or reach these strong results continue to demonstrate the success of our simple strategy of providing reliable broadband services to an expanding area of rural America via partnership with some of the best and most proven business and financial leaders across the communications.
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Our newest strategic growth partner is simply fiber, a leading fiber based broadband provider serving communities across Washington, Oregon, Idaho and Montana.
Todd will be providing additional detail about our investment in deeply in his remarks.
Before handing the call over to Todd I would like to mention a few other notable events from the quarter.
We are honored to have been named to PC magazine's list of top 10 fastest Internet service providers in the nation for the second consecutive year.
This recognition is further confirmation that our continued network investment is enabling us to meet the rising demand for broadband capacity and to provide the backbone for technological advances as the number of internet of things connected devices continues to increase.
Pivoting to charitable, giving and keeping with our values, which are do right by those we serve drive progress and lend a hand cable one associates raised nearly $50000 earlier. This fall for feed my starving children, a nonprofit organization committed to providing food to schools.
Finishes medical clinics and feeding programs in 70 countries around the world to break the cycle of poverty.
As part of the same effort cable one donated an additional $10000 to support local food banks and the markets we serve.
In addition to these donations we are proud to share that we recently awarded a $125000 in grants to nonprofit organizations across our footprint through our cable one charitable giving fund and the two years since its inception. This fund has awarded more than 120 grants totaling nearly half a million.
To support nonprofit organizations and building strong and vibrant communities improving quality of life and making a positive difference in the cities and towns, where we live and work.
And now Todd who will provide a full recap of our third quarter financial performance.
Thanks, Julie before I begin I'd like to remind everyone that our third quarter 2022 results do not include the operations of clearway fiber.
Managed IP or the heart rate Tallahassee operations, which we divested or contributed to new partnerships earlier this year and predominantly represent business services units and revenues.
Additionally, the results for the third quarter of 2021 did not yet include cable America operations.
Whenever we discuss our year over year results on an adjusted basis today, we are excluding these operations from both periods.
Starting now with revenues total revenues for the third quarter of 2022 were $424 $7 million.
Compared to $432 million in the third quarter 2021, a one 3% decrease.
The decrease was primarily due to the contributed operations to clear wave fiber at the beginning of the year, partially offset by increases in higher margin residential data and business services revenues from continuing operations.
On an adjusted basis, our total revenues increased by one 4% for Q3 residential Internet grew by five 7% and business services revenue grew by 5%.
Operating expenses were $125 million or.
Or 28, 4% of revenues in the third quarter of 2022 compared to $121 7 million or 28, 3% of revenues in the comparable quarter of the prior year.
Selling general and administrative expenses were $86 million for the third quarter of 2022 compared to $95 $1 million in the prior year quarter. These expenses were 23% of revenues in the third quarter of 2022 compared to 22, 1% of revenues.
In Q3, 2021, a 180 basis point improvement.
Net income in the third quarter was $70 6 million or $11 53 per share on a fully diluted basis.
Adjusted EBITDA was $224 6 million for the third quarter, an increase of one 9% when compared to 2021.
Our adjusted EBITDA margin was 52, 9%.
As a reminder, the results for this period don't include the EBITDA generating assets that we contributed to clear waved fiber earlier this year. Please.
Structure as we have mentioned in the past the strength and flexibility of our balance sheet has always been something we deem as the long term asset and a key strategic contributor to our track record of delivering above average shareholder returns that.
That rings, even more true in this current rate and economic environment, and we remain well positioned to navigate this market with our earliest maturity being over three years from today, our weighted average cost of debt for the quarter at less than three 5% and nearly 75% of our borrowings under long term fixed.
Contracts.
We maintained a modest leverage ratio throughout the quarter remaining right at four times as we continued to utilize excess cash flow to return capital to our shareholders.
From a liquidity standpoint, we had $255 $7 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 unsecured notes and $5 million of finance lease liabilities.
We also had approximately $456 million available for additional borrowings under our revolver as of September 30.
In Q2, we reported that we had entered into a new agreement, providing incremental letters of credit capacity with one of our core lending partners. Subsequent to quarter end, we have been able to move previously issued letters of credit from our revolver to this new facility not only meaningfully reducing the ongoing cost of issuance but.
Also increasing our liquidity with full access to our $500 million revolving credit facility.
As Julie mentioned in her remarks on September six we entered into an agreement to invest $50 million into simply fiber one of the leading broadband infrastructure platforms, serving rural communities in the Pacific northwest or.
Our opportunity to invest in the growth of simply alongside wave Division capital and Searchlight capital partners is yet another exciting example of our relatively unique but simple approach of extending and advancing our partnerships with some of the best and brightest operational and financial mines across the.
<unk> landscape.
With that we are now ready for questions.
We will now begin the Q&A session. If you would like to ask a question. Please press star followed by one or you touched on key pad.
For any reason you would like to remove that question. Please press star followed by two.
To ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking a question.
We will policy or briefly to allow questions to generate in Q.
The first question comes from the line of Phil Cusick with Jpmorgan. Please proceed.
Hey, guys. This is Nick on for Phil.
So you call. It a dramatic decrease in move activity is there any color you could provide on particular regions where that might be.
And would you say that your share of gross adds is lower or trending downwards as other cable companies have seen and called out.
Thanks.
Nick This is Julie.
Yes.
I will make assumptions on the moves dropping.
Other operators have seen this earlier, we did not people were still moving to our communities, which we saw throughout the pandemic.
So my assumption is higher interest rates are causing people pause to move at this point in time.
And the overall economic environment.
On top of that so we.
We definitely saw the downturn in the third quarter of news coming into the market affecting our connects in term of share of gross adds no I mean again, it's just the total.
Mount connect again, our churn is at record lows. So people who are with us are staying with us.
But we have to try.
Could you bet business differently in this environment. The environment has changed so we have to change we have to try a different tactics, we have to play different pressure points and do test. So that we can see how we can attract people in this environment.
Got it thank you.
Thank you.
The next question is from the line of Greg Williams with Cowen. Please go ahead.
Great. Thanks for taking my questions can you talk about the <unk> I think you mentioned, it's up two 5% year over year broadband offer that is.
Somewhat of additional accretion from recent past and wondering what sort of unleashes the RP to accelerate whether it's the gross adds challenge that you mentioned, Julie or the buy ups to the 300 plus Meg programs.
And second question is just on your dividend hike. It was only up 10 cents versus your typical cadence 25.
Is that really just a function of repositioning your capital allocation towards the stock repurchasing or is there something else to read here. Thanks.
Yes, I'll start with the first Todd can take the second.
Yes, great question on <unk>.
You may recall last quarter, we discussed that maybe we are just maybe a tad too cute and trying to make adjustments to our <unk> and by that I mean, we migrated just 15% of our customers to a higher tier or higher priced service, we gave them double the speeds double the data.
We moved some.
High value items into our highest packages and we did something that's counter to what we typically do we typically.
<unk> promos and discounting to a minimum and we did a deeper discount on that entry tier and.
When we saw the results of that we made some course corrections quite honestly, but it takes time for those corrections to flow through.
We do believe that as we continue to.
Higher tiers and.
<unk> heard the rates, 64% above 332% for gig.
<unk>.
That we will what we're seeing is really happy customers that as they are sticky they are not churning.
And.
The need for data as one of the most impressive things that I really think we all should be taking note of.
It is growing dramatically and and you and I can both in margin innovative products that will come through and take advantage of those higher data throughput that have value to customers that we will be able to monetize.
I believe those will be the drivers of <unk> in the in the long range future and in the short range. It's the course corrections that we took place immediately after last quarter.
Again in most cases customers are choosing the high data throughput plans.
And another interesting.
Fact is that household income is not a key influencer of usage. According to our data that means no matter. What your income is you want and need data.
And we're a great provider of that.
Hey, Greg This is Todd on the on the dividend side of the equation broader capital allocation we did.
I wouldn't say temper the growth of the dividend.
Consistently been that quarter.
In the last quarter.
We announced that we increased it which we believe in the consistently increasing dividend as we always have but we increased it at a more moderate pace up at 10.
Per quarter, or 40, <unk> annually and a lot of that was related to how we looked at the mindset of return of capital to shareholders.
Of course, we.
Reinstituted, our buyback plan in the first quarter and then to date, we've already bought back.
Investing in ourselves and returning capital to shareholders through our buyback over $300 million.
Through this quarter, so when you kind of combine them.
A massive increase relative to that return of capital, but going forward capital allocation remains very consistent as it always has been balanced appropriately network investment very proactive on the network investment organic opportunities that we continue to see whether thats edge out or expansion markets. Obviously, we've done some inorganic.
Investments in that cadence was high was tempered a little bit as we focus on integration and then that return of capital, which will continue to be whether it be buybacks. If we deem at the right value, whether it be dividends or debt repayments.
Got it thank you.
You bet. Thank you.
The next question comes from the line of Craig Moffett.
With Moffitt Nitzan SD.
SDB Securities. Please proceed.
Hi, Thank you guys.
Two questions if I could.
First the ACA has posted on its website I think a while back that.
Its members will have a wireless product in the market by the end of this year I Wonder if you could just comment on what your plans are with respect to wireless.
And then second if we just stay on the topic of broadband <unk> for a second how do we think about pricing.
And more direct price increases rather than mix increases to boost broadband <unk> is that something you feel like the market is prepared for given the.
The pressures that you faced with relatively low priced fixed wireless broadband offers.
Your footprint.
Yeah.
Craig It's Julie.
Regarding wireless product that is something that we continue to stay close to and watch talking to folks that are launching products and pricing with their broadband bundle.
There needs to be.
A use case customers.
This seems to be something that customers need and demand and we have to feel like it's a competency that that we can bring to the table as it relates to this now if we see that it it does.
Provide some stickiness to the bundle.
It's something that would provide.
A bigger lower for us to jump into the Fray, but quite honestly right now with our business and the growth that we have in front of us in terms of units and <unk> and integrating the properties that we have or may have to come is quite honestly keeping us quite busy. So we will stay close to it they have no immediate.
It <unk>.
Plant.
Oh <unk> was your second question and I was like that's fine too.
So we absolutely think that rate increases are a viable option absolutely.
The.
We do pricing elasticity studies and keep in mind, even though <unk>.
And it tends to sound high compared to other operators you know that our pricing is not high it tends to.
Get pulled higher by our customers choosing higher priced plans or plans that have value added features such as unlimited data. So.
Rate increases absolutely on the table.
Okay. Thank you.
Okay.
Thank you.
The next question comes from the line of Frank Louthan with Raymond James. Please proceed.
Alright, great. Thank you. So looking forward I mean, I hear that the pressures things changed in the market at all but we are sitting.
Sitting here a year from now and you've put up consistent positive HST adds what will change what have you.
One of the things that you can do to kind of ensure that that that kind of growth happens over over the next 12 months. Thanks.
That's a great question Frank.
We do have to re imagine how we do business again I alluded to the fact that in the past we've had competition across 100% of our footprint in that with DSO and we had parity product at that time. This was back in the day when when.
So called cable operators, we're hanging around 25, Meg product and we are very similar to our our DSL peers. What happened was we innovated and we grew.
<unk>.
Listen to our customers, we found needs that they had and we found ways of serving those needs. So I think it's incumbent upon us to find potentially different cohorts that we haven't gone after in the past if we can do so in a way that maintains our margin.
And we have to find different ways of speaking to our customers that resonate. We also so that goes to marketing. We also need to make sure that our products are meeting their needs and that we are delivering it in a way that is frictionless.
I think that we've made real progress there as evidenced by our.
Our record low churn and and actually related to turn our competitive churn has significantly improved year over year that is to say.
We think think of all of our markets as competitive but there are some that we can set our hyper competitive.
That so called 33% of our market that has a provider of that.
<unk>.
Offers 100, megs or more to their customers as well and those markets churn is improving significantly and we found that customers that we've on boarded in the past two two and a half years have.
Lower churn than their traditional cohorts. So we think we're going down the right path and how we are.
Quite honestly, taking care of our customers and we owe that to our local associates.
Who are our neighbors to our customers.
Alright, great. Thank you very much.
Okay.
Thank you. The next question comes from the line of Brendan.
The pill with Keybanc. Please proceed.
Great.
Thank you Julie.
You mentioned integration activities can you can you talk about the integration that you're doing that are greater than obviously fidelity in terms of cost synergies and maybe Todd.
Chime in on what that means for the expense profile.
Secondly, I guess related to that could you talk about inflation in your cost basis.
Obviously, lower sub growth <unk> pressure somewhat pressured the top line, but what about expenses, especially as we're looking out to next year.
<unk> higher wage increases.
What are you seeing for fuel et cetera. Thank you.
Yeah, Hey, Brent you want to start or are you I know you can do lean work backwards okay.
Brandon I'll, let the inflation one Julie can talk about some of the.
Integration and I can even hit on some of the cost synergies as well.
<unk> side, yes, you're spot on I mean, we're seeing it everybody has seen it there is definitely pressure there.
Talent retention critically important that you have the right team and making sure as people are both personally and professionally being impacted by this.
But do you have the right retention strategies of wage inflation.
Is real.
We look at things like fuel.
That's impacted us it is not.
Cereal, but it's there.
When you look at things.
Reassessment of property values like property taxes has had some impact so a lot of these things as it relates to just price inflation over the last two to three years.
Materialize themselves in some of the cost increases for US, which is why we had to take a very intentional and focused approach is to in this type of economic environment. How do we prioritize those costs, how do we make sure we're very aware and intentional.
On balancing that in this challenged economic environment and Thats, where.
We were able to keep margins consistent even with what was a little bit softer top line and Thats something that is really the power of the scale that we have in that and the power of the.
The infrastructure that we've built.
Related to integration activities I would start actually with.
Deconsolidation activities, because they're taking up as much time as the integration activities are quite honestly so.
The teams work together to get clearway fiber customers onto their own billing platform and that's really important for them and for us because we've been partially supporting them until we can get them over to their own system. So that was a big win for both teams.
We're doing the things that we typically do like you know the very first thing of course is <unk>.
Financial reporting and getting people on payroll, but immediately then we start assessing how do we connect the technology platforms, how do we get to parity on pricing and packaging, which by the way we are absolutely making progress on.
How do we.
Institute.
Similar cultural things to make people feel part of the team and be able to integrate the folks such that we can help each other out at the biggest Q wins for anything and so the faster we can get the folks all hooked together on the same platforms. The same technologies. The sooner we can all help each other with handling any volume.
That we have.
Fidelity has done incredibly well quite honestly just running on their own.
As we mentioned, beating their third year EBITDA targets I'll, let Todd talked about a little bit more so because of that.
Look to integrate hardware quicker there on a sort of homegrown billing system. So we considered it a more of a priority to get them onto something more stable.
So those are just give you a snippet of some of the things that are going on to make them more.
Or like one big happy family.
You even mentioned that fidelity success in such a complement to that team and the leadership, there and the execution day to day.
But there was a <unk>.
Really complementary operational business rural Great gross invested in the network amazing team and some of the things that we always talk about that are key to our inorganic growth strategy and capital allocation philosophy for acquisitions and M&A and investments.
That one to achieve describes that and what they've been able to achieve even without some of that.
Called yet too.
Come.
Platform integrations that always lead to additional cost savings.
Far exceeded the expectations over that two to three year timeframe that we focus on for integration <unk>, we outlined when we announced that transaction.
Just north of $40 million cost savings expectations, and we're well along our path as it relates to that without some we've again there was heavy lift.
And intentional lift platform integrations that will come over the next 12 to 18 months. So we feel very confident about that as we've said in the past M&A is that a high cadence over the last three years to four years, that's something that now we are very focused on integrating flawlessly.
But longer term.
We believe it's still a very accretive opportunity for our shareholders.
As our.
Track record in integrating these consistent.
And like minded platforms.
Okay.
Thank you Tim answered.
I could just ask an additional question that would be great.
And the question relates to seasonality in the business, obviously you reported.
HFC net adds is there any reason to believe fourth quarter seasonality should be consistent this year as in previous years I E lower generally in the fourth quarter.
Well.
The way this year has gone quite honestly, Brandon I don't know that but I've said too a lot of associates is whatever you know shake it out of your head because the world is different.
That being said, we see growth in the fourth quarter so far.
Thank you very much.
Thank you.
That's all we have time for.
I will now pass it back to Julie for closing remarks.
Thank you Tia.
As always I would like to thank our associates as they represent the heartbeat of cable one's results the Todd and I are discussing today. We appreciate everyone joining us for today's call and we look forward to speaking with you again next quarter. Thanks all.
Okay.
That concludes today's conference call. Thank you you may now disconnect your lines.