Cable One, Inc. (NYSE:CABO) Q4 2023 Earnings Call Transcript
Cable One, Inc. (NYSE:CABO) Q4 2023 Earnings Call Transcript February 22, 2024
Cable One, Inc. beats earnings expectations. Reported EPS is $19.39, expectations were $12.86. 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: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One Fourth Quarter and Full Year 2023 Earnings 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 Todd Koetje, Chief Financial Officer. Please go ahead.
Todd M. Koetje: Good afternoon, and welcome to Cable One’s Fourth Quarter and Full Year 2023 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. 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, in 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 or on our website at ir.cableone.net. During today’s call, whenever we refer to our results on an adjusted basis, we are excluding certain non-core assets we divested in the Second quarter of 2022, which exclusively provided business services. Joining me on today’s call is our President and CEO, Julie Laulis.
With that, let me turn the call over to, Julie.
Julia M. Laulis: Thank you, Todd, and good afternoon, everyone. We appreciate you joining us for today’s call. With nearly a decade under our belt as a public company, I’d like to start off today’s call with a brief reflection on our contrarian roots and how I believe they contribute to our success today and into the future. We have always been a different kind of operator. Our safe harbor strategy that concentrated on small cities and large towns really pivot away from video to broadband and focus on attractive roaring broadband acquisitions are just a few examples of how we have set ourselves apart from other providers in the past. Today, we continue to lean into those contrarian roots, leveraging our differences and evolving for the future.
We have a plan to achieve balanced growth over time, a robust infrastructure to support customers’ increasing needs for bandwidth in a diversified rural footprint where our local operations and the neighborly experience we provide is a meaningful differentiator. We believe this combination will continue to drive high margins and generate significant free cash flow. In the fourth quarter of 2023, Cable One was among the few operators who grew customers, expanding our residential broadband base by more than 1,600 customers. Notably, this growth was driven by both an improvement in new connects year-over-year and sustained load churn rates. We have re-engineered our go-to-market approach to strategically target new customer segments with attractive pricing and product offerings, deployed countermeasures to address competition and expand our network footprint.
We believe these changes to our tactical plan drove our results. This customer growth momentum began at the end of third quarter, persisted throughout the fourth and continues to-date. Similarly, our unconsolidated investments continue to show strong customer and financial growth. While we are focused on increasing our residential market share, we also understand the importance of achieving balanced growth over time. Our ultimate financial objective remains to consistently generate significant free cash flow for our investors, something we accomplished again in 2023 reaching yet another all-time high for full-year adjusted EBITDA less capital expenditures with a 9.7% growth year-over-year. This underscores our ability to perform financially, even amid challenging market conditions.
We generated this free cash flow while continuing to invest in our already robust network, ensuring we remain ahead of the consumption curve. Nearly a quarter of our residential Internet customers now use more than a terabyte of data per month, a 17% increase over the same period last year. We have managed this surge effectively, as overall network utilization during peak hours remained at approximately 20% for both downstream and upstream traffic. Given this available capacity, we are well-positioned to moderate our capital spending in support of our efforts to sustain a trajectory of continued free cash flow growth over the long-term. As always, we remain steadfast in our commitment to maintain a network so robust that our customers never second guess the reliability of their service.
Beginning in the fourth quarter, we increased efforts to broaden our reach by marketing to value conscious customers in ways we haven’t previously emphasized. We also introduced value added benefits such as free unlimited data to retain the customers we have served exceptionally well for decades. And, we have surgically implemented changes to our pricing and packaging to broaden our appeal among new and existing customers. We are pleased with the early results we are seeing, and we will continue making significant investments in our marketing and branding strategies to ensure our message reaches a wide audience. Although we face some wired competition, we anticipate that our footprint will remain relatively less competitive than urban markets, providing meaningful opportunities for increasing penetration.
However, when a new provider prepares to enter one of our markets, we are ready to respond aggressively with a comprehensive and multi-dimensional playbook. In targeted situations, we will also compete more aggressively on price. We have a clear understanding of the capital constraints and the return dynamics faced by new entrants to our markets, especially during times of heightened capital and construction costs. We believe that these dynamics, coupled with our responses, have already caused potential newcomers to rethink their entry into some of our markets. In terms of wireless competitors, it bears repeating that we believe Cable One offers a superior service, and our new value-based offers go head-to-head on price. Fixed wireless is known to have capacity limitations with recent reports indicating usage limits and potential throttling.
In contrast, our network effortlessly accommodates customers with high data usage needs. It’s worth noting that across our footprint, our new customer offers include unlimited data, underscoring our ongoing commitment to listening to our customers and prioritizing their needs with the services we provide. Our efforts to strategically target value conscious customers and fiercely compete where necessary resulted in downward pressure on ARPU for our residential data customers during the fourth quarter. We anticipated this, and expect that we can continue to effectively manage ARPU going forward as we fine tune our tactics to achieve balanced growth over time. Although targeting the value segment is expected to pressure ARPU in the near-term, we view this as an acceptable trade-off for defending our markets, expanding our customer base, and enhancing long-term value.
As I said earlier, we understand that achieving balanced growth is essential for our long-term success and we believe we are currently taking the necessary steps to achieve that. Ultimately, our philosophy aligns with the wisdom of the late great Charlie Munger who consistently sought partnerships with companies that, “Generate substantial cash flow”. In 2023, despite competitive and economic challenges, we achieved our highest level of free cash flow ever. With our focus on subscriber growth in 2024 and discipline over operational and capital expenditures, we are poised to continue growing free cash flow over time. Before I turn it over to Todd, I want to emphasize that the heart of our operation is a personal approach to service delivery.
This is another differentiated aspect of our business model. It is rooted in the fact that a majority of our associates and a substantial number of leaders are integral members of the communities in which they live and work. Our customers are their friends and family. Their loyalty and trust matters to our associates. I recently heard a story from one of our systems that beautifully illustrates this commitment. One of our Hargray technicians was on a service call to troubleshoot a video problem for an elderly customer. As it turned out, it wasn’t an issue with our video service. The customer’s TV was broken. Recognizing the customer was not in a financial position to purchase a new one, the technician, unbeknownst to anyone, purchased a brand new TV out of his own pocket, delivered it, and set it up for this customer.
I could share dozens of similar examples, but I’ll simply reiterate our people truly are the backbone of our company and our success. And now, Todd, who will provide a full recap of our fourth quarter and full-year financial performance.
Todd M. Koetje: Thanks, Julie. Before discussing our 2023 full-year results, I’d like to start by touching on some of the key quarterly figures from our fourth quarter financials. For the fourth quarter of 2023, our total revenues were $411.8 million a 3.2% decrease from the fourth quarter of 2022, driven by a 21.3% decrease in residential video revenues. Residential data revenues, however, increased 2.1% year-over-year with PSUs growing more than 1,600 during the fourth quarter. Business services revenues declined 0.5% year-over-year whereas data services revenue within the business services offerings exceeded the comparable residential data revenue growth rates. Net income was $115.3 million for Q4 2023 compared to a net loss of $77.2 million in Q4 of 2022.
Adjusted EBITDA was $226.9 million a decrease of 2.7% when compared to 2023 as revenue gains in data services were outpaced by revenue attrition rates in the video product. Adjusted EBITDA margin expanded 30 basis points to 55.1% year-over-year. Capital expenditures totaled $115.6 million in Q4. During the quarter, we invested $21.9 million of CapEx for new market expansion and $9.4 million for integration activities. Our fourth quarter capital expenditures were elevated due to timing of strategic projects with the completion of several large initiatives and the launch of new ones. We also capitalized on opportunities to procure discounted equipment for future network expansion, particularly for enhanced [ACAM] (ph) projects backed by 15 years of government funding.
Additionally, we accelerated the deployment of our wall-to-wall Wi-Fi products, which has significantly enhanced the customer experience and bolstered retention rates. These investments reflect our commitment to long-term growth and operational excellence. Adjusted EBITDA less capital expenditures decreased from $126.4 million in the fourth quarter of 2022 to $111.3 million in the fourth quarter of 2023. This decrease is primarily driven by the higher capital expenditures incurred in the fourth quarter of 2023 as previously mentioned. Now, turning to our full-year results. Starting off with revenue, total revenues for 2023 were approximately $1.7 billion a decrease of $28 million or 1.6% from 2022. On an adjusted basis, after taking into account the divestiture of certain non-core assets from the second quarter of 2022, total revenues declined 1.4%.
The decrease was driven largely by the continued decline in revenues from our lower margin, deemphasized residential and business video product lines, including a $67.2 million decrease in residential video revenues. The growth of our most profitable residential and commercial broadband product lines continues to drive our business forward. As the demand for reliable high-speed broadband expands across all customer groups, so does the confidence in our continued success and ability to strike the right long-term balance between subscriber growth and ARPU. For 2023, our residential data revenues grew by $44.7 million or 4.8% when compared to 2022. Year-over-year, business services revenues declined 0.2% but grew approximately 1% on an adjusted basis.
And as mentioned earlier, data services within our business services offerings experienced healthy growth during the year. Operating expenses were $440.9 million or 26.3% of revenues in 2023 compared to $470.9 million or 27.6% of revenues in the prior year, a 130 basis point improvement, driven largely by a $49.9 million decrease in video programming costs. Our focus on innovation and investment has led to significant efficiency gains, including a 25% decrease in average monthly truck rolls per 1,000 customers and a 16% drop in contacts per customer since 2020. These advancements, along with our disciplined approach to cost management, demonstrate our proactive strategy in aligning with decreasing video revenues. Selling, general and administrative expenses were $354.7 million for 2023 compared to $350.3 million in the prior year.
SG&A as a percentage of revenue was 21.1% for 2023 compared to 20.5% for 2022, with the increase driven by marketing and branding initiatives, higher labor costs, and meaningful investments that we are making in software and service platforms. These are driving ongoing digital transformation initiatives in the areas of enhanced customer and associate experience. Adjusted EBITDA was $916.9 million for 2023 compared to $911.9 million for 2022, an increase of 0.6%. Our adjusted EBITDA margin for 2023 was 54.6%, representing a 120 basis point improvement compared to the prior year. Capital expenditure totaled $371 million for 2023, which equates to 40.5% of adjusted EBITDA compared to $414 million and 45.4% in the prior year. Our capital expenditures have trended downward over the past two years, thanks to the meaningful investments we’ve already made in our network, specifically with the DOCSIS 4.0 network architecture.
The significant excess capacity generated by these investments provides us with the confidence to manage our total capital expenditures towards the low 300s for 2024. Adjusted EBITDA less capital expenditures was $545.9 million for 2023 compared to $497.8 million for the prior year, a nearly 10% increase. We will continue to evaluate application of the meaningful cash flow that this business generates and stay rooted in our philosophy of long-term oriented investments and conservative balance sheet management. We will remain balanced across network investments, digitally oriented platform investments, organic and inorganic growth opportunities and continue a diversified return of capital strategy consisting of disciplined debt repayment, consistent dividends and opportunistic share repurchases.
In 2023, we distributed $66.3 million in dividends to shareholders, bought back over 141,000 shares for $99.6 million and repaid $163.7 million of debt, of which $150 million represent volunteer repayments of our outstanding revolver balance. As of December 31, we had approximately $190 million of cash and cash equivalents on hand. Our debt balance was approximately $3.7 billion consisting of approximately $1.8 billion in term loans, $920 million in convertible notes, $650 million in unsecured notes, $338 million of revolver borrowings and $5 million of finance lease liabilities. We also had $662 million available for additional borrowings under our $1 billion committed revolving credit facility. Earlier this week, we repaid an additional $50 million of revolver borrowings, further reducing our go forward debt service costs, our floating rate debt balance and expanding our unfunded committing revolving credit capacity.
Our weighted average cost of debt for 2023 was 4.22%. Our net leverage ratio on a last quarter annualized basis was 3.85 times and the vast majority of our borrowings are either fixed issuance or have been synthetically fixed under long-term contracts, considerably mitigating our exposure to the prevailing rate environment. Additionally, the nearest final maturity for any of our debt instruments does not incur until 2026. In addition to the other investment activity previously discussed during the year, during the fourth quarter we invested the remaining $13.9 million under our subscription agreement with Ziply Fiber, bringing our total investment in this growing fiber provider to $50 million. Looking at our unconsolidated investments, in total, residential and business data customers grew by approximately 9,800 or 1.2% on a sequential basis in the fourth quarter and more than 83,600 customers for the full-year 2023.
This does not include the operations of Metronet, where we have a less significant investment. The ongoing expansion of these businesses reinforces our enduring strategy of collaborating with experienced management teams and partnering with the most reputable financial agencies in the sector. Before we turn to Q&A, I’d like to address the Affordable Connectivity Program, also referred to as ACP, for our broadband customers. While it is still possible congress might provide funding to continue the program, we are prepared for the likelihood that funding for the program will be depleted by April. We’ve initiated communications and are taking proactive steps to prepare for the potential impact on our approximately 50,000 ACP subscribers. It is important to note that less than 20% of these customers have a plan fully funded by ACP, while our other ACP customers are subscribers who pay for a portion of their current plan.
We understand that the end of the program could be disruptive for many. However, we’ve carefully mapped out the most appropriate landing places based on our customers’ financial and usage needs, and we are committed to ensuring the smoothest possible transition. Additionally, we see this as a potential opportunity to gain new customers as the lapse in funding might prompt those not satisfied with your existing provider to explore alternative Internet service providers. With that, we are now ready for questions.
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