Cable One, Inc. — 2019 Q3 Form 10-Q
Reporting period: Quarter ended September 30, 2019; unaudited results compared with the quarter and nine months ended September 30, 2018. Cable One provides data, video and voice services across 21 states and reported 821,079 customer relationships. It operates as one reportable segment.
Financial results
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $285.0 million | $268.3 million | +6.2% |
| Operating income | $80.1 million | $63.3 million | +26.5% |
| Net income | $49.8 million | $38.3 million | +30.1% |
| Diluted EPS | $8.68 | $6.70 | +$1.98 |
| Adjusted EBITDA | $140.0 million | $122.7 million | +14.1% |
Q3 operating margin was approximately 28.1%, up from 23.6%; net margin was approximately 17.5%, up from 14.3%. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Revenue | $849.2 million | $802.4 million | +5.8% |
| Operating income | $221.9 million | $198.6 million | +11.7% |
| Net income | $125.0 million | $122.8 million | +1.8% |
| Adjusted EBITDA | $410.7 million | $373.2 million | +10.0% |
| Operating cash flow | $335.2 million | $307.6 million | +9.0% |
| Capital expenditures | $176.3 million | $159.2 million | +10.8% |
Operating cash flow less capital expenditures was approximately $158.9 million for the first nine months of 2019, before acquisition spending and other investing activity.
Revenue mix and operating trends
- Q3 residential data revenue rose 8.2% to $134.3 million; business services revenue increased 28.0% to $50.7 million, including $7.0 million from Clearwave.
- Residential video revenue fell 4.2% to $81.0 million, and advertising revenue declined 19.6% to $5.1 million. Residential voice revenue was broadly flat.
- For the first nine months, data revenue increased 8.3% and business services revenue 27.5%; video, residential voice and advertising revenue declined.
- Year over year, total customer relationships increased 2.5%, while total product subscriptions (PSUs) declined 0.8%. Data PSUs grew 4.3%; video PSUs fell 9.4% and voice PSUs fell 5.4%.
- Management attributes growth to organic data and business-services gains, reduced package discounting, premium-tier uptake, Clearwave and business modem rental charges. It expects data and business services growth to continue and anticipates continued declines in residential video and voice.
Liquidity, debt and capital allocation
- At September 30, cash was $145.8 million, down from $264.1 million at December 31, 2018; working capital was $43.9 million, versus $184.2 million.
- Total debt, including finance leases, was $1.314 billion; long-term debt net of issuance costs and current portion was $1.278 billion. The company had $343.3 million available under its $350 million revolving facility after $6.7 million of letters of credit. It reported compliance with debt covenants.
- Borrowings under the senior credit facilities bore rates of 3.55%–4.05%. Two swaps fixed rates on $850 million of debt beginning in 2019 and a further $350 million beginning in June 2020. A hypothetical 100-basis-point LIBOR increase would have raised annual interest expense by $4.6 million at September 30, before considering the swaps’ full effects.
- Investing cash outflow was $527.6 million, primarily reflecting the $358.8 million Clearwave acquisition and capital expenditures. Financing cash inflow was $74.2 million, including new debt proceeds and repayments.
- The company redeemed $450 million of 5.75% notes in June, incurring a $6.5 million call premium and debt issuance cost write-offs. It paid $6.25 per share in dividends during the first nine months, including a $2.25 quarterly dividend; a further $2.25 dividend was declared for payment in December, subject to stated record-date terms.
Acquisitions, outlook and risks
- Clearwave, acquired January 8, contributed $19.9 million of revenue and $3.6 million of net income from acquisition through September 30. Its preliminary purchase accounting included $185.9 million of goodwill.
- Fidelity was acquired October 1, after quarter-end, for a base cash price of $525.9 million subject to adjustments. It was funded with cash and a $450 million delayed-draw term loan. Management cited prospective revenue growth, Adjusted EBITDA margin expansion and cost synergies; integration and realization remain uncertain.
- No specific financial guidance was provided. Management said cash, credit facilities and operating cash flows were expected to support requirements over the next 12 months, while noting dependence on future performance and conditions. It plans continued broadband and fiber investment and focus on higher-margin data and business services.
- Key risks include competition, programming and retransmission costs, regulation and franchise renewals, acquisition integration and synergies, leverage and variable-rate exposure, and network reliability. The filing disclosed a recent information-security incident that may have affected personal information of some current and former employees and related individuals.
- The $120.9 million fair-value liability on interest-rate swaps drove a $91.1 million after-tax nine-month loss in other comprehensive income. No material impairment was recorded. Management said ordinary-course legal matters were not expected to have a material adverse effect; Part II reported no legal proceedings.
Important facts for investors to verify
- How much reported growth reflects Clearwave and other acquisition effects versus organic performance, especially in business services.
- Fidelity’s final purchase-price allocation, integration costs, realized synergies and resulting leverage after the October closing.
- Data and business-services subscriber growth and margins relative to continuing video and voice subscriber losses.
- Cash generation after capital expenditures, dividends, debt service and acquisition-related spending; assess whether liquidity remains adequate.
- Debt repayment, interest-rate sensitivity, swap valuations and potential cash-flow effects, as well as cybersecurity incident scope and any resulting costs or obligations.