Cable One, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Cable One provides residential and business data, video, and voice services in 21 U.S. states. Its results include Fidelity, acquired October 1, 2019; year-over-year comparisons therefore reflect both acquisition effects and organic performance.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $321.2 million | $278.6 million | +15.3% |
| Operating income | $92.7 million | $67.7 million | +36.9% |
| Operating margin | 28.9% | 24.3% | +4.6 percentage points |
| Net income | $69.3 million | $38.7 million | +79.0% |
| Diluted EPS | $12.05 | $6.78 | +77.7% |
| Adjusted EBITDA (non-GAAP) | $157.7 million | $133.1 million | +18.5% |
| Operating cash flow | $118.5 million | $104.4 million | +13.5% |
| Capital expenditures | $64.8 million | $46.6 million | +38.9% |
Adjusted EBITDA margin was approximately 49.1%, versus 47.8%. Operating cash flow less capital expenditures was approximately $53.7 million, compared with $57.8 million a year earlier. These are derived figures; Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
Revenue growth was led by residential data (+19.4% to $155.0 million) and business services (+22.7% to $57.9 million). Residential video revenue rose 1.8% to $85.3 million, despite subscriber declines, and residential voice revenue rose 29.1% to $12.4 million. Management attributed growth primarily to Fidelity, organic growth in data and business services, reduced package discounting, higher-tier subscriptions, and video rate changes. Video and voice comparisons also reflect acquired operations and, for voice, certain fees newly reported gross rather than net.
At March 31, 2020, cash and cash equivalents were $241.9 million, up from $125.3 million at year-end. Total assets were $3.30 billion. Long-term debt carrying value was $1.81 billion and current debt was $28.9 million; outstanding term loans and revolver borrowings were approximately $1.8 billion. The company had $221.3 million available on its $350 million revolving facility and was in compliance with debt covenants. It borrowed $100 million on the revolver in March at 2.43%. Management said cash, facilities, and operating cash flow were expected to fund requirements over the next 12 months, subject to business and economic conditions.
Material changes and notable items
- Customer relationships increased 12.6% year over year to 921,000; total data PSUs increased 16.9% to 793,000. Total video PSUs fell 5.4% to 303,000. Acquisitions contributed to these changes.
- Operating expenses rose 12.1%, primarily from Fidelity. SG&A increased 2.3%; its share of revenue declined to 19.6% from 22.1%. Depreciation and amortization increased 21.2%, including Fidelity-related expense.
- Net gain on asset sales and disposals was $5.6 million, including a $6.6 million non-cash gain on tower-property sales. Q1 2019 included a $1.6 million gain on former headquarters property.
- The effective tax rate fell to 8.5% from 24.6%, primarily reflecting a $7.0 million CARES Act NOL carryback tax benefit, increased equity-compensation tax benefits, and state tax changes.
- Unrealized cash-flow hedge losses, net of tax, were $84.6 million, versus $29.1 million. Interest-rate swap liabilities totaled $202.0 million at quarter-end, versus $89.7 million at December 31, 2019; the reported hedge valuation changes primarily affected other comprehensive income.
- Quarterly dividends paid were $2.25 per share ($12.8 million total). No shares were repurchased under the repurchase program during the quarter.
Outlook, risks, and contingencies
The filing provides no formal financial guidance. Management expects continued growth in residential data and business services, ongoing investment in broadband capacity and network reliability, and continued declines in residential video and voice over time. The company offers Gigabit service to more than 97% of homes passed and is deploying DOCSIS 3.1. Management also intends to pursue rural broadband acquisitions and investments.
Management reported no material Q1 operating impact from COVID-19. It anticipated a larger-than-usual increase in residential data customers and revenue in Q2, partly offset by lower overage fees, late charges, reconnect fees, advertising and business-services revenue, and higher labor, bad-debt, and other expenses. The duration and overall financial impact were uncertain. Customer-relief measures included waived late fees and suspended service disconnections for qualifying customers, discontinued data overage fees, a temporary $10 low-income data plan, and public Wi-Fi hotspots; commitments were scheduled through June 30, 2020.
Key risks include pandemic-related operating and collection challenges; competition; rising programming and retransmission costs; execution and integration of acquisitions and systems; regulatory changes; network and cybersecurity risks; and substantial debt, variable LIBOR exposure, and financing restrictions. Two swaps cover $1.2 billion of variable-rate debt, but the filing reports material fair-value volatility. The company also guaranteed up to $22.0 million of a third party’s FCC broadband-program performance obligations; management assessed nonperformance as remote and recorded no liability. Management reported no legal proceeding expected to materially affect the company and no material change in previously disclosed contractual obligations.
Important facts for investors to verify
- How much reported growth reflects Fidelity versus comparable organic growth, particularly in revenue, subscriber metrics, and margins.
- Whether anticipated Q2 COVID-related data additions offset reduced fees and weaker advertising/business-services revenue, and whether elevated expenses or bad debt persist.
- Debt levels, remaining revolver availability, covenant headroom, LIBOR transition plans, and the cash-flow and earnings effects of interest-rate swaps.
- Whether capital spending and planned network upgrades generate expected returns while supporting the dividend and other capital-allocation priorities.
- The sustainability of earnings growth given the CARES Act tax benefit and the non-cash tower-sale gain included in Q1 results.