Cable One, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Cable One provides residential and business data, video and voice services across 19 states, with one reportable segment. On May 1, 2017, after quarter-end, it completed its $735 million cash acquisition of NewWave.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $207.4 million | $202.8 million; up 2.3% |
| Operating income and margin | $60.4 million; 29.1% | $47.4 million; 23.4% |
| Net income | $33.2 million | $27.0 million; up 22.8% |
| Diluted EPS | $5.80 | $4.65 |
| Adjusted EBITDA (non-GAAP) | $97.9 million | $85.4 million; up 14.6% |
| Cash from operations | $78.3 million | $77.5 million |
| Capital expenditures | $35.9 million | $27.4 million |
| Cash and cash equivalents | $173.5 million at March 31 | $138.0 million at December 31, 2016 |
| Total debt, including current portion and capital leases | $544.0 million at March 31 | $545.3 million at December 31, 2016 |
Working capital was $106.1 million at March 31. The company had $197.2 million available under its revolving credit facility and reported compliance with debt covenants. Operating cash flow less reported capital expenditures was approximately $42.3 million; this is a simple subtraction, not a company-reported free-cash-flow measure.
Material changes and operating trends
- Residential data revenue rose 8.1% to $90.2 million, supported by 2.2% growth in residential data PSUs, reduced package discounting and more premium-tier subscriptions. Average monthly residential data revenue per unit increased 6.0% to $63.53.
- Business services revenue grew 13.2% to $27.0 million; business customer relationships increased 8.5%. Management cited growth in data and voice services and business video rate changes.
- Residential video revenue fell 3.2% to $72.5 million, while video PSUs declined 12.7%. Residential voice revenue fell 12.8%, with voice PSUs down 11.7%. Advertising revenue declined 19.7% to $5.6 million.
- Total PSUs declined 4.0% year over year to 943,882, while total customer relationships decreased 0.7% to 660,968.
- Operating expenses excluding depreciation and amortization fell 9.6%; SG&A rose 4.2%, and depreciation and amortization rose 10.7%.
Outlook, unusual items and risks
- Accounting estimate: New systems and processes led the company to begin capitalizing certain construction and customer-installation labor costs. Capitalized labor was $5.9 million higher in Q1 2017 than in Q1 2016. Excluding this benefit, management reported net income of approximately $29.5 million and year-over-year growth of 9.1%, versus reported net income growth of 22.8%; Adjusted EBITDA growth excluding the estimate change was 7.7%, versus reported growth of 14.6%.
- Other unusual item: A net gain on asset disposals of $6.1 million was recognized, primarily related to the sale of part of the former headquarters property; proceeds were $10.1 million.
- Management outlook: Cable One expects residential data and business services to grow, while video and residential voice revenues are expected to continue declining. It plans continued broadband infrastructure investment and stated that interest expense would increase beginning in Q2 2017 following NewWave-related borrowing. No quantified earnings or revenue guidance is provided.
- Acquisition and financing: NewWave was acquired on May 1 for $735 million cash, debt-free and cash-free, subject to customary adjustments. The company also incurred $750 million of senior secured loans: $250 million incremental term A and $500 million term B, used to fund the acquisition, repay existing term A loans and pay fees and expenses. Preliminary purchase-price allocation was still being finalized.
- Risks and contingencies: Management cites competition, programming-cost and retransmission-fee increases, technology changes, regulation of broadband, franchise renewals, network and information-system security, and the ability to integrate NewWave and realize expected benefits. Ordinary-course litigation was disclosed; management did not believe existing matters were likely to have a material effect. Franchise-related surety bonds and letters of credit totaled $5.5 million, with no expected payments.
- Management said liquidity, amended credit facilities and operating cash flows should support funding needs over the next 12 months, subject to operating performance and other conditions. Q1’s effective tax rate was 37.4%, versus 33.0%, reflecting prior-year tax benefits that did not recur.
Important facts for investors to verify
- How the $5.9 million labor-capitalization estimate change and the $6.1 million asset-sale gain affect comparisons and future periods.
- NewWave’s final purchase-price allocation, integration progress, realized synergies and resulting debt, interest expense and leverage.
- Whether residential data and business-services growth can offset continued video, voice and advertising declines.
- Capital expenditure requirements, cash generation, dividend policy and remaining revolving-credit availability after the acquisition.
- Potential effects of competitive, programming-cost and regulatory developments, including changes to broadband rules.