Cable One, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good day, and welcome to the Cable One Fourth Quarter and Full Year 2020 Earnings Call. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Steven Cochran. Please go ahead.

[Steven Cochran:]

Thank you, Vaishnavi. Good afternoon, and welcome to Cable One's fourth quarter and full year 2020 earnings call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion may contain forward-looking statements relating to future events that involve risks and uncertainties. You can find factors that could cause Cable One's actual results to differ materially from these forward-looking statements in today's earnings release and in our recent SEC filings.

[Julia Laulis:]

Thank you, Steven and good afternoon, everyone. We appreciate you joining us for today's call. Each year, as we look back and take back of our accomplishments, we are grateful for our associates, whose hard work and dedication continue to drive our success. But in 2020, an extraordinary year by any measure, the commitment that our associates made to keep our customers and communities connected to what matters most was exceptional. Whether quickly pivoting to find an innovative means to care for customers during the pandemic, working diligently to restore service during one of the most active hurricane seasons are on record, while responding to the tremendous increase in customer demand, our associates rose to every occasion with grace and never lost sight of Cable One's values to do right by those we serve drive progress and lend a hand. I want to thank each and every Cable One associate for their strength, compassion and resilience over the past year and as we continue to navigate through these challenging times. We encountered a new adversity with the recent severe winter storms that impacted our Texas market. Our team worked diligently to restore service to approximately 20,000 customers that were affected by commercial power outages and damage from snow and ice. Cable One also donated $15,000 along with food and supplies to local non-profit agencies, including The Salvation Army to support relief efforts in our Texas market. I am also incredibly proud of the results that this team delivered in 2020 and the relentless effort they have demonstrated through the start of 2021. I'll share with you some of the highlights from this past year and then turn it over to Steven, who will provide a full recap of our financial performance and financing activities. Before getting into performance highlights, a quick word about our recently announced agreement to acquire the remaining equity interest of Hargray Communications. We are very excited for this transaction, and we are looking forward to our Hargray colleagues joining Cable One. We'll get into more detail on this a bit later in the call.

[Steven Cochran:]

Thank you, Julie. Before I begin, I'd like to remind everyone that because of the contribution of our Anniston, Alabama systems to Hargray on October 1, Anniston operations are not included in our fourth quarter 2020 results. For context, these operations represented approximately 19,000 residential HSD customers and produced third quarter 2020 revenues of $9.4 million. The fourth quarter of 2020 generated solid financial results. Revenue for the fourth quarter were $337 million compared to $319 million in the prior year quarter, a 5.7% increase. This increase was fueled by residential HSD revenue increase of 17.1% and the business services revenue increase of 3.4%. Our fourth quarter results include $1.2 million of credits for customers who had experienced brief outages during our most active hurricane season in recent history.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Phil Cusick with JPMorgan. Phil, are you in there? Is your line muted? Okay. It looks like his line is muted or he's not able to hear. I'm going to move on to the next question is from Greg Williams with Cowen. Please go ahead.

[Greg Williams:]

Great. Thanks for taking my questions. Steve, I'll pick up right where you left off on financing the Hargray deal. In the past, you typically said you would be comfortable going up to about 3.5 times leverage. Is that sort of range still an area where you'd be comfortable going or would you consider even going higher considering the credit markets? And second question, I just was looking at Slide 7, which is super helpful on the Hargray acquisition and the $45 million in run rate synergies. Can you unpack some of those synergies? How much of it is the tax NPV versus OpEx and CapEx? Thanks.

[Steven Cochran:]

Sure. So on the first question on the financing, I think, we definitely – we've always said that we're comfortable living in the 3.5 times range, comfortable going higher if we thought we could delever quickly. Clearly, I think we have the ability to delever quickly on this, both from our own growth and the growth of the businesses we've been acquiring. That being said, probably more importantly, what we have also said as part of our strategy is to have a strong balance sheet, and we're going to opportunistically look for our chances to create and have a strong balance sheet because that's been a huge part of our ability to transact over the last several years. And so with that in mind, we'll look for those opportunities. I think, first and foremost, we are focused on getting certainty and we were able to accomplish that both because of moves we had made in the past to create the cash and revolver capacity we had to get the bridge financing that we put in place, but also that they didn't move and get the Hargray debt lined up. So we feel great about certainty to be able to close the transaction and be comfortable with that as a starting point, and now we'll look to be opportunistic and improve the balance sheet where we get the chance. From the synergy standpoint, there's not a lot of tax benefit. There's a little bit of tax benefit. The majority of it really is both expense and revenue synergies. That look very similar to types of synergies we've realized historically, whether you go to NewWave or Fidelity. This is a similar type transaction. Part of it is putting in the Cable One playbook and taking advantage of what Hargray does well, apply that across our company and then go and look and things that have worked really well for Cable One and apply our business model to that. And that's why we put three years out there. We don't ever want the synergies to drive the decisions. We want to make sure that the right business moves are the reason we make the decisions we do, but we feel very comfortable that we'll realize that kind of synergy over a three-year time period.

[Greg Williams:]

Got it. Thank you.

[Operator:]

The next question comes from Craig Moffett with MoffettNathanson. Please go ahead.

[Craig Moffett:]

Hi. Thank you. Steve and Julie, two questions, if I could. First, you're obviously always looking at acquisitions, I guess. The headline price and even the post synergy price for Hargray is an awfully high price relative to public cable multiples. I'm wondering if you could just talk about what you're seeing from potential acquisition candidates in terms of their expectations and does that make it harder to get deals done of significant size? And then second, I guess, the issue that all your larger peers are struggling with is, how to think about broadband growth for 2021 in the absence of the work-at-home and pledge dynamics and that sort of thing of 2020? Can you just talk about how you think growth – what are the puts and takes to growth this year and how you think that 2021 will compare to, say, 2019?

[Steven Cochran:]

Sure. So on the deal multiple side of it, I mean, clearly, we have seen multiples move up, and we've also seen our own multiple move up. And we think justifiably so, we think businesses that are HSD focused that are HSD-led that have a competitive environment like we do that have a growth profile like we do. We think that drives a multiple that looks much more infrastructure like, and that's what we've seen on both things we looked at and not either participated in or looked at and not transacted on. Fortunately, we've been able to find a number of transactions where there were other things other than just price that mattered, they really cared about where their people landed, who is going to be serving their communities, those kinds of things that allowed us, and we were still able to be fair in transacting, but also getting deals done that were outside of processes. And so I think we feel very comfortable that the multiples we're paying for assets that look similar to what we are that we're going to be able to apply our business model to and should have the same trading characteristics that we've had because of the dynamic of the business model that we're operating in maybe compared to some of the larger peers. On the customer growth side, I'll let like Julie take that.

[Julia Laulis:]

Sure. Thanks, Steven. We are proud to have built infrastructure that is focused on customers, particularly serving those customers that are the least served, until we showed up in those markets. And I think that we have the belief that there is going to be a tipping point where what we had built would be needed by our customers. We had thought that likely it would be applications and services that would be writing on our networks. We have no idea that it would be a pandemic. But it came, and our network was there for our customers, and we grew as our peers grew and that growth continues. As you know, Craig, we have room on the penetration side to grow. And now that there is a true need for the type of network that we provide for the type of reliability and service that we provide, it continues to grow. And we feel confident that we have the dual levers of unit growth, penetration growth as well as ARPU growth as customers elect to take higher speed, higher data packages. If the pandemic has taught us anything, it's that we can't predict or control things the way we would like. But right now, we're feeling really good about the business that we're in.

[Craig Moffett:]

Thank you.

[Operator:]

The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

[Q - Brandon Nispe:]

Okay. Great. Thanks for taking the questions. Maybe are both for Steven. But Steven, EBITDA margins are clearly pretty strong for this business over 50% for the year. When you look at sort of the acquired cable systems versus legacy Cable One's footprint, could you sort of frame for us the spread between the more mature systems and the newer assets for you in terms of EBITDA margins? Then, Julie, you're obviously, you made some comments on the organic HSD sub growth during the first quarter. What type of level of growth do you expect in 2021? And maybe what would be helpful is if you could frame for us what level of organic HSD net adds you had in 2020 and 2019, just for frame a reference. Thanks.

[Steven Cochran:]

So, Brandon, on the – first question on the EBITDA margins. So I think a couple of things on that. First, I would say, there's obviously a lot of conversation around what's a pull forward and what's not a pull forward. What I would say, we've seen because we've continued to see accelerated growth, as Julie mentioned, both in the fourth quarter and as so far as the first quarter. So maybe it isn't a pull forward. What there is – is an acceleration of our business model. We've always talked about what was going to happen when the business kept going, and we added more data customers and add less video customers. And because of our approach on video, we've seen accelerated video losses and vastly accelerated HSD gains. And because of that, our margins just moved more quickly to where we thought they would move to, and they're going to continue to move to. As it relates to the actual acquisitions themselves, we don't truly go down to EBITDA for them. But if you look at kind of system cash flow type that we would evaluate on a market-by-market basis. They're all getting really close. Clearly, the legacy CABO stuff just because of where it was in the plan is further along. NewWave has closed the gap significantly. And Fidelity has actually unbelievably closed partly because of what we talked about with the synergy realization piece that we've had on that, that they're actually running very hot on that as well. And that's part of the – that's clearly part of the M&A strategy. I mean part of what we try to do is make sure that we have opportunities to deploy our capital in the most effective ways. We think that's through either network expansion or M&A. And then when we buy things, we execute and put our business model on it, and we generate more free cash flow. And then the goal is to go and find other things to invest that in because we think that's the beauty of our model. It's great if you can have a business that generates a lot of free cash flow. But if you can actually redeploy that into business that's similar, we think that's kind of what is the secret sauce of it has worked so well at Cable One to this point.

[Julia Laulis:]

Yes. And I think, Brandon, that Steven just answered your second question to really the best of our ability. And again, we can't predict and we can't control, but we can tell you that we have growth, we have continued to accelerate growth in the fourth quarter, and it's still going strong now. We've got room to grow, and we're doing it.

[Brandon Nispe:]

Thanks for taking the questions.

[Operator:]

The next question comes from Frank Louthan with Raymond James. Please go ahead.

[RobPalmisano:]

Hey, guys. This is Rob on for Frank. Thanks for taking my question. So can you talk about the outlook for you guys under a potential Title 2 net neutrality scenario and how much do you think you'd have to raise pricing if data caps weren't allowed hypothetically? Thank you.

[Julia Laulis:]

Thanks, Rob. It's Julie, I'll start, Steven, feel free to jump in. First, we're strong believers in net neutrality. We don't throttle. We don't have fast lanes. We believe in an open Internet. We don't believe that it needs to be legislated, however. When you talk about possible regulation and raising prices, a couple of thoughts come to mind. One is that the actual amount of ARPU that comes from usage-based billing has gotten relatively small under our new pricing and packaging scenario. So what's driving our ARPU growth on the residential HSD side? Well, over 70% of people elect to go into a package that's higher than 100-megs. And those carry higher prices, right? They also elect to take unlimited data packages, which drives ARPU. We also, which I just think is really smart. We don't discount any package other than that 100-meg package. So when people elect and it's by far and away the majority, that the higher priced packages they're buying them at full price. We are not deeply discounting. So those are the things that are driving ARPU for us. Our 100-meg service is an – well, all of our services. But if you really look at our 100-meg service, it is a tremendous value at $55. And by the way, it has been $55 since the fall of 2015. We have not raised the prices on our residential HSD services. And it is the sell-in and the lack of discounting and a little bit of UBB that allows value price to be available to the majority of the customers and those that want more or use more, they pay more. We think that's a really beautiful value proposition for customers.

[Rob Palmisano:]

Great. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Laulis for any closing remarks.

[Julia Laulis:]

Thank you, Vaishnavi. I want to thank our associates for all they have done and continue to do during an incredibly uncertain and challenging time. This team continues to be the driving force behind our success. And I feel especially privileged to work alongside of them each and every day. We appreciate everyone joining us for today's call and look forward to speaking with you again next quarter. Thanks all.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.