Cable One, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Amounts are in U.S. dollars; financial amounts below are in millions unless noted.
Business context
Cable One provides residential and business data, video and voice services across 19 states. It became independent of Graham Holdings Company (GHC) on July 1, 2015. The 2015 comparison periods therefore reflect pre-spin operations and may not be directly comparable: GHC provided corporate support, and its debt and related interest were not allocated to Cable One before the spin-off.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $204.6 | $202.7 | $407.4 | $405.6 |
| Operating income | $50.6 | $35.8 | $97.9 | $71.7 |
| Net income | $26.6 | $21.4 | $53.7 | $43.5 |
| Diluted EPS | $4.62 | $3.67 | $9.27 | $7.45 |
| Adjusted EBITDA (non-GAAP) | $88.9 | $77.6 | $174.2 | $152.3 |
| Free cash flow (non-GAAP) | $51.3 | $40.0 | $109.2 | $83.0 |
Revenue grew 0.9% in Q2 and 0.4% in the first half. Operating margin, calculated from reported figures, was approximately 24.7% in Q2 (17.7% prior year) and 24.0% in the first half (17.7%). Net margin was approximately 13.0% in Q2 (10.6%) and 13.2% in the first half (10.7%). Adjusted EBITDA increased 14.6% in Q2 and 14.4% in the first half; reported Free Cash Flow increased 28.1% and 31.5%, respectively. These are non-GAAP measures defined by the company and may not be comparable with other issuers’ measures.
- Revenue mix: Q2 residential data revenue rose 18.7% to $86.0; business services rose 12.0% to $24.5. Residential video fell 14.2% to $74.0, residential voice fell 11.5% to $10.9, and advertising declined 9.6% to $6.6.
- Cost and earnings drivers: Q2 operating costs excluding depreciation and amortization declined 4.2%, including a $3.0 reduction in programming costs. SG&A fell 17.0%, partly due to lower billing-system processing costs, wages and benefits. The first-half trends were similar.
- Interest and taxes: Interest expense was $7.5 in Q2 and $15.1 in the first half, versus $1.0 in each 2015 comparison period, reflecting debt incurred around the spin-off. Effective tax rates were 38.3% in Q2 and 35.7% for the first half, versus 38.5% in both 2015 periods.
- Cash flow and investment: First-half operating cash flow was $125.6, versus $117.2; capital expenditures were $65.0, versus $69.3. Cash declined $16.5 during the half to $102.7.
Financial position and capital returns
At June 30, 2016, cash and cash equivalents were $102.7, total assets $1,373.9, and working capital surplus $35.5. Debt totaled $547.8 gross, comprising $450.0 of 5.75% senior notes due 2022, $97.5 under senior credit facilities, and $0.3 of capital leases. The balance-sheet carrying amount of debt, after issuance costs and current maturities, was $538.8. Senior credit facility borrowings bore 2.14% interest; the company reported compliance with debt covenants. A $200 million revolving facility and an uncommitted incremental facility of up to $300 million are described.
First-half financing cash outflow was $66.5, including $46.5 for share repurchases and $17.3 in dividends. Since the repurchase program began, 145,903 shares had been repurchased for $62.9; the program authorizes up to $250 million, subject to a 600,000-share limit. The company said it expects cash, operating cash flow and credit facilities to support its operating plan, planned capital expenditures, dividends and repurchases for the next 12 months, subject to operating performance and other conditions.
Operating trends, outlook and risks
- Management is prioritizing higher-margin residential data and business services, customer retention and cash flow rather than maximizing total service units. It expects data and business growth to continue; it expects residential video and voice revenue declines to persist.
- Over the 12 months through June 30, total customer relationships declined 1.8% and total PSUs fell 6.5%. Residential video customers fell 15.6% and voice customers 13.9%; residential data customers rose 1.8%, and business relationships rose 10.9%. Management cautioned that business customer counts were affected by a billing-system counting-method change.
- Broadband capacity, reliability and all-digital video upgrades are ongoing. Management expected a significant portion of capital projects to be completed by year-end 2016, potentially freeing cash otherwise used for investment. No quantified earnings or revenue guidance was provided.
- Risks include competition from telecom, satellite and OTT providers; programming and retransmission cost increases; continued video and voice customer losses; regulation and franchise renewals; technology and network security; and execution of business-service growth. The D.C. Circuit upheld the FCC Open Internet Order in June 2016; future regulatory changes or appeals remain uncertain.
- Contractual obligations totaled $1,070.1, including estimated programming commitments of $461.1 and debt principal of $547.8. Programming commitments depend on subscriber counts and tier placement. Surety bonds and letters of credit totaled $5.1; management did not expect payments under them. The filing reported no legal matter expected to have a material effect and no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether residential data and business-service growth can continue to offset substantial video and voice declines.
- Whether reported expense reductions are sustainable, including savings following the billing-system conversion.
- Progress and remaining cost of broadband upgrades, and whether project completion actually releases cash as expected.
- Debt service, covenant headroom, revolving-facility availability and the company’s capacity to sustain dividends and repurchases.
- How the pre-spin comparison basis and business-customer counting change affect interpretation of year-over-year operating trends.