Q2 2019 Earnings Call
Good afternoon, and welcome to the cable one Cabo earnings report Q2, 2019 conference call.
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I would now like to turn the conference over to Steven Cochran Senior IR. Please go ahead.
Thank you Ashley.
Good afternoon, and welcome to cable one's second quarter 2019 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 may contain forward looking statements relating to future events and expectations.
You can find factors that could cause cable into actual results to differ materially from these projections listed in today's earnings release and in our recent SEC filings.
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 cable one does not.
Joining me on today's call is our president and CEO , Julie Lawlis with that let me turn the call over to Julie.
Thank you Stephen good afternoon, and thank you for joining us for our second quarter 2019 earnings call and our first earnings call with a large portion of our company now branded as spark light.
I will review a few highlights and then hand, it over to Steven price for a recap of our financial performance.
First I would like to thank our associates for providing our customers with outstanding service.
As a result of their commitment and dedication we were recently recognized by cable box, that's a top customer service provider among all mid size operators.
Additionally, we were honored to be named on the Ford 2019 list of America's Best Midsized employers.
Cable one was the only MSR recognized on this list.
ER positive second quarter results flow from the work of those outstanding Associates.
Some highlights include year over year increases in total revenues of 6.4%.
And adjusted EBITDA of 8.1%.
Our adjusted EBITDA margins increased 80 basis points year over year to 48.2% for the quarter.
The solid growth and improved margins are reflective of the sustained mix shift driven by our business strategy the impact of our new residential HSD pricing and packaging in the continuous improvement mindset with which we run our business.
We saw a 3.4% residential HSD unit increased and residential HSD ARPU was up 4.9% year over year, resulting in an 8.5% increase in residential HSD revenues.
Business service revenues were up 29.3% year over year or 11.7%, excluding the impact of clear waiver.
We're very pleased that our two primary growth drivers are performing so well.
Our residential HSD pricing and packaging changes have resulted in a nice mix of units and ARPU increases.
Which are being fueled by customer choice rather than implementing an across the board rate adjustment.
We have also been taking a steadily increasing share of business services segment by generating more sales market from the existing customer base.
We see this work as vital to driving our core business, which is a top priority.
In parallel we are devoting significant resources towards integration planning and execution associated with our three accretive acquisition.
On top of those activities, we have allocated ample efforts to our sparkling rebrand and legacy cable one markets, which our customers began seeing in early June .
Well, we are nearing the end of new wave integration efforts, we still have projects that are creating real value and improving the customer experience.
Our teams are making significant progress with network upgrades and standardization and we are in the process of launching gigabit speeds across the majority of these markets as well as implementing new usage based billing.
The migration of phone customers onto our provisioning is essentially complete which will result in further synergy realization.
Finally, we are in the process of decommissioning the office and data center and likes to Missouri, while finalizing our expansion of the customer care and operations center in nearby Poplar Bluff with this expansion all care centers will be fully integrated.
Well, they're supposed to simulation activity in connection with a clear way back position, we're pursuing operational synergies by aligning our teams more closely so that we are maximizing learnings across the entire organization.
Meanwhile, we are excited to support clear waved expansion plans, while helping them develop and implement strategies to accelerate growth.
We believe clear wave is well positioned to continue its upward sales trajectory and we are investing in that business to capture even further gains.
We have also been very fortunate to get to know the team at fidelity prior to close.
We appreciate the enthusiasm in the spirit of teamwork from both the ownership group and the associates, who will be joining us as we prepare for the expected closing of this transaction.
Not surprisingly fidelity is having another strong year as well, which is reflective of their leadership and focus.
Fidelity is a great company and wonderful markets, but more importantly, we are gaining a talented group of associates, who we believe will fit in very nicely a cable one.
We are making excellent progress on our rebrand to spark light our web site and customer billing now reflect our new brand associates. Our systems are wearing sparkly uniform, some batches and truck perhaps on signage are well underway.
We've engaged both associates and customers in the new brand through a variety of mediums and we are thrilled by the positive response, we've received.
We'll be hosting sparkling launch parties for the communities we serve throughout the remainder of the summer and into the fall to engage our customers with our new brand.
We were pleased to announce another dividend increase earlier this week up 12.5% to eight to dollar and 25 per share quarterly dividend dividend or from $8 to $9 per share on an annualized basis.
Before I hand, the call over to Steven I'd like to take a moment to welcome Mary met do ski the newest member of the cable onboard.
We are very fortunate to have an accomplished and engaged board and Mary will further add to that with her insight an extensive background in media telecommunications and technology industries.
And now.
Kevin will provide more financial details on our second quarter results.
Thanks Julie.
The second quarter of 2019, once again produced strong financial results revenues for the second quarter of 2019 were 285.7 million compared to $268.4 million in the prior year quarter, representing a 6.4% increase.
As Julie mentioned this increase was fueled by residential HSD revenue increase of 8.5% and the business services revenue increase of 29.3%.
Excluding clear wave operations total revenue increased 3.9% year over year.
Net income in the second quarter was 36.4 million and net income per share on a fully diluted basis was $6.35 per share.
Operating expenses were 95.7 million or 33, and a half a percent of revenues in the second quarter compared to 91.8 million or 34.2% of revenues in the prior year quarter or a 70 basis point improvement.
Selling general and administrative expenses were 60.1 million or 21% of revenues and 54.2 million or 20.2% of revenues for the second quarter of 2019 and 2018, respectively.
The increase in EPS January was primarily attributed to higher rebranding acquisition related and other expenses incurred during the quarter as well as additional costs related to the clear wave operations.
Adjusted EBITDA was 137.6 million for the second quarter of 2019 and increased 8.1% from $127.2 million in the prior year quarter.
Our adjusted EBITDA margin increased 80 basis points year over year going from 47.4% to 48.2%.
Capital expenditures totaled $63.9 million and 49.8 million for the second quarter of 2019 and 2018, respectively.
Included in the current quarter were 2.5 million of capital expenditures related to clear wave operations.
Year to date capital expenditures as a percentage of adjusted EBITDA and revenue were 40.8% and 19.6% respectively in line with our expectations.
And the second quarter of 2019, we paid out 11.4 million in dividends to shareholders.
During the quarter, we borrowed 325 million under our new term loan B maturing and 2026, we also refinanced our existing term loan a with a new $250 million term loan I established a new 450 million dollar delayed draw term loan I and expanded the capacity of our revolving credit facility to $350 million.
These loans mature and 2024.
Proceeds from these transactions together with cash on hand were used to redeem $450 million of senior unsecured notes on June 15th.
With the remainder to be used to finance the fidelity acquisition, which is expected to close early in the fourth quarter and for other general corporate purposes.
From a liquidity standpoint, we remain in excellent position as we had approximately 102 million of cash on hand as of June Thirtyth.
We continued to generate significant free cash flow and at quarter end, our debt balance was approximately 1.3 billion consisting of term loan borrowings.
Overall, our debt to adjusted EBITDA after netting cash on hand against debt was a 2.2 times, providing us with ample liquidity.
We also had 345 point $344.5 million of available.
For borrowings under our revolving credit facility as of quarter end.
On a separate note our residential voice ARPU increased $4.10 from prior year as a result of certain pass through fees that were reported on a net basis. Historically residential voice ARPU would have decreased slightly to 33 point $33. A 14 cents from $33.22 if reported on a comparable basis.
We are pleased with another healthy quarter and excited about the opportunities. We have ahead as we look forward to a busy second half of the year.
Ashley we're now ready for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Zach Silva B. Riley FBR. Please go ahead.
Okay, great. Thank you for taking the question I'm wondering if we can talk first about the rebranding and weather.
You've seen in the early benefits or maybe even negative from a subscriber perspective with regard to either gross adds or churn.
Hi, Zack its Julie I'm I think it really is too early I mean, we just started going out to market in June and the actual system locations are just signing changing signage uniforms trucks as we speak on a rolling basis. It doesn't just flash cut right. We did do a baseline study with our customers before we began and we will do another one at the end of the summer as well as the end of the year.
To capture their understanding of the brand and their interactions and perception of the brand.
I would say from social and talking to our associates.
The consumers are having similar.
Reactions to the brand as our own associates, Jed I think they they like the idea of it but there.
Some of them are like are we sending the payment to the right place in this day and age of security people are very concerned is this cable one spark light is this is my check going to the right place to somebody buy cable wants so we're clarifying things like that so it's early.
Okay, that's great and then.
Another one kind of a two parter is just if you could update us on the unlimited plan.
Penetration and then perhaps you guys are still getting a benefit from customers, taking higher speed tiers, but just wondering if you've seen.
Yes, 90 change and that the actual number of customers taking them, but I guess the rate of change and the amount of customers going up tier for maybe the year ago period.
Sure maybe I'll give a couple of stats from our recent pricing and packaging change.
That took place in January .
We are continuing to see over 50% of the folks dial in at higher tiers that are standard 100 Meg flagship.
We are seeing an acceleration.
And the style and of our unlimited plan. It is selling in over 10% at this point in time, that's the plan where for $40. Additional you get on limited data on any plan that you buy.
I'm trying to think of other stuff that might be interesting.
I think of the people, who have our new pricing and packaging at this point in time.
Our flagship in in that group is actually the 200 Meg plant.
So in our general base to build 100, Meg and those who have been new.
Pricing and packaging 200, Meg is the.
Service level that has seen those customers.
Got it okay Thats interesting. Thank you very much.
Mhm.
Your next question comes from Craig Moffett with Moffett Nice Nathanson. Please go ahead.
Thank you.
Before his julianne Steve.
A question on on margins if I could.
Steve you called out.
The still elevated as DNA.
And some of the reasons why S. DNA is higher.
If I kind of normalize that you're getting reasonably close to 50% margins.
Hi, how high do you think margins can get in your business and.
And as you think about the drivers for that can you just.
Maybe help us understand the margin trajectory over the both the next year or so and then also longer term.
Well I won't give any direction on where we go exactly over the next year, but I think what I would say anyway to that and Julie.
And if you if you agree or not but I think in general as we continue to migrate.
And transition our customer base to less and less video and more and more data and commercial services. Both of those have obviously much higher gross margin businesses and then much higher EBITDA margin profiles and so as we continue to make that change we see no reason why those EBITDA margins won't move to where we think the product margins are.
And with that I think.
Being a scale and just for a long time, we always thought 50% whats kind of that cap, but that was the pickup it was kinda generated by the fact that video was part of it and it's a much different mindset now with video being out of it. So I don't think we think is a video we don't think 50% as any kind of cap and one thing we will obviously move well beyond that over the next five to 10 years.
And I agree the mix is a big part of it and we do.
Tend to focus on continuously improving on.
The expense side to Craig it's part of the DNA here. So we.
Hey, very close attention.
And if I could ask a corollary question.
Your capital intensity I think you've pointed out in the past that you cautioned against excessive enthusiasm for capital intensity declines just because the denominator without video and it is smaller.
But.
Can you can you just talk about.
The kind of the same atmosphere, if you will around capital intensity and how we should think about longer term capital intensity trends.
Yeah. So I think clearly we think the base business capital will go down as a percentage of revenue will go down as low or no not as long as not not in line with where I think the industry is talking about knowing.
And that's for the base capital I mean to be perfectly honest I mean, the best use of our capital is to invest back in the business and more than anything we want opportunities to expand fiber expand network grow customers, especially investments in our commercial business and so while we believe it will go down on what the base is just because of the nature of.
The growth in the efficiency and the investments we've made and the network already.
Our hope is actually that we find many opportunities to redeploy our cash back into the business. So we'd probably one we don't give guidance in general, but we probably get even less guidance on this because we're looking for opportunities to be able to invest in the business. Because we think that's the best way to get shareholder return.
Great. Thank you.
Your next question comes from Philip Cusick with JP Morgan. Please go ahead.
Hi, Thanks.
Julie can you give us an update on what your typical promotions are in more and less competitive markets and what that mix of sales looks like.
Sure.
So Phil.
In 2018, we sort of had what I say.
We refer to as a cooling off period, where we are establishing value with our customers. So what we did is we pulled off of our promotions and used our everyday price to again really establish value.
Then we started doing tests across a variety of different markets to figure out what.
Customer choices appealed.
Most and then we launched our pricing and packaging in January of this year.
This year we.
The majority of the time, we have basically everyday low pricing with short periods of sale and those carries a fail or typically well they're always on.
Our flagship surface, our 100 Meg service, so that is to say and here's here's maybe an interesting point that.
When someone gets a promotion they get a promotion on that 100 Meg service. We just said that over 50% of the people who were taking our new pricing and packaging are coming in above that level.
All the services in tears above that level.
Three months on occasion.
Longer.
And you've talked about pushing harder in some of the against some of the more competitive markets is that not.
Happening anymore today.
Yeah, No we definitely do not have one size fits all anymore and our <unk>, what I would call our hyper competitive markets because you know technically all of our markets are.
Have some sort of competition, whether its vigorous or not we could we could debate, but in our hyper competitive markets. We.
Our biggest lever is honestly unlimited data.
And that's what those markets get versus reduced pricing by and large.
Got it understood and.
Between integration.
Savings and revenue picking up we've talked about EBITDA performance ramping through the year any reason to think that doesn't happen.
No actually I see you know when I think about how our year is shaping up.
Our strategy for the year is really playing out and and momentum is gathering if you think about it we didn't take an across the board rate adjustment.
For HST in January instead, we did site, our new pricing and packaging and as the year goes by we have more and more people on those packages that have higher selling that take the unlimited that drive the ARPU up as well as we're just rolling out usage based billing in new wave at this point in time and the senators really start kicking in towards the end of the year and into 2020, So I I think momentums on our side.
Great. Thanks very much.
Your next question comes from Brandon fill with Keybanc. Please go ahead.
Hey, Thanks for taking the questions Julie I'm curious.
Have you ever tried to quantify what the addressable market is in your footprint for business services and then you mentioned accelerating some investments there with clear wave can you talk about where those are going to support.
Thanks sure.
Sure. So in terms of quantifying I think what you're asking Brandon is what is our Tam starving the business service World.
Right.
Yeah, Yeah. So we've done that for legacy Cabo, we have not done that for new wave certainly not.
Fidelity, yet and wait for clearer and we haven't for clear waiver. So so in part we have it and so we sort of use those results and extrapolate.
In terms of investments and clear wave here are a couple of examples we're in the process of upgrading our core there from 10 gig to 100 gig and that's being driven by mogul.
Providers, who who are asking for that.
So we basically the sales or are already there and that will be done by the end of the year. We're also.
Putting in capital in order to buy a large construction equipment and more fiber so that they can accelerate or on what they're already doing really well. We're also from an operational standpoint, adding headcount. So there's those are just a few examples of the investments both on the capital side and operating side that we're making clear waiver.
Got it I guess I didn't quite catch a Tam number and then I guess I'm curious within this commercial business.
Is it primarily carrier customers enterprise SMB and one of the products the service that achieved primarily provide.
I apologize because I missed the first part of your question.
Oh I was just trying to trying to get the Tam that you guys had for cable one.
And the business footprint.
Yeah right.
It that's not something that we've shared before we typically will talk about our our penetration I'm in the marketplace, but not our total Tam yes.
Needless to say, our our our penetration of the addressable market is much lower than our penetration of customers because we kind of only SMB businesses in our market and we're really just recently started going after the enterprise in higher level services and so that's the opportunity that we see in the commercial spaces. You know obviously continuing to serve those customers, we have well and driving whatever penetration gains we can but more importantly, continuing to move up market and gain a greater share of the the higher revenue customer opportunities right and the percentage of sales that are coming from that market segment, our growing quarter over quarter.
Great. Thank you for taking the question.
You bet.
Your next question comes from Stephan Bisson with Wolfe Research. Please go ahead.
Good afternoon, just a couple I was wondering could you kind of describe fidelitys profile and how it looks compared to Cabo I guess, how far down the road they are on.
Shifting to connectivity and improving margins.
Okay.
Yes, sure so I'm just.
From a where they had in the process I would say there much closer to where we are from a strategy standpoint, the new wave was with new way was acquired.
And other video penetration look similar to ours I think men <unk> really mentality standpoint, I think there is a lot more people, it's kind of already embraced that as a concept as far as where the business is going and how it's going.
And so we think that makes that part of the transition.
Much easier and so from that standpoint.
I think we feel very aligned with where they are right, but from a margin perspective, there's room to continue to look alike to cabos financials.
Great and is that margin improvement, where you see the most opportunity in those assets.
Well I guess I would call it sort of the the lookalike to our financials, whether you know.
From you know HSD ARPU to overall margins to there's a little bit of synergies thrown in there, it's a little bit of everything and they're doing a lot of the same things. We are they're growing commercial they've got nice opportunities to continue to move up market in commercials are expanding and so I think for all of those reasons. It's just it's just a great said it really just adds additional footprint for us to take a strategy strategy thats working very well and continue expanding that.
Great. Thanks, so much.
This concludes our question and answer session I would now like to turn the conference back over to Julie Lafollette for any closing remarks.
Thank you Ashley I want to thank all of our associates for a great quarter I will be participating in a fireside chat at the Keybanc capital markets Technology Conference next Monday, which will be webcast on our Investor Relations site at IR Dot cable on Dot Nat we appreciate everyone joining us for today's call and we look forward to speaking with you next quarter. Thank you.
The conference has now concluded thank you for attending today's.