Cable One, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars. Cable One operates cable systems in 19 states, providing residential and business data, video, and voice services. It became independent of Graham Holdings Company on July 1, 2015, so pre-spin comparisons may not represent results on a standalone basis.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $205.5 million | $198.2 million | $612.9 million | $603.8 million |
| Operating income | $43.8 million | $39.0 million | $141.8 million | $110.7 million |
| Net income | $20.9 million | $19.4 million | $74.6 million | $63.0 million |
| Diluted EPS | $3.63 | $3.30 | $12.91 | $10.75 |
| Adjusted EBITDA (non-GAAP) | $87.2 million | $77.4 million | $261.9 million | $229.7 million |
| Operating margin | 21.3% | 19.7% | 23.1% | 18.3% |
Q3 revenue rose 3.7%, operating income 12.4%, and net income 7.5% year over year. Nine-month revenue increased 1.5%, operating income 28.0%, and net income 18.4%. Adjusted EBITDA increased 12.6% in Q3 and 14.0% for the nine months; it is a company-defined non-GAAP measure and is not a substitute for cash flow or GAAP earnings.
For the first nine months, operating cash flow was $193.6 million, versus $194.7 million; capital expenditures were $91.3 million, versus $99.2 million. Cash increased $4.5 million to $123.7 million. Working capital surplus was $57.3 million. At September 30, total debt was $546.5 million, including $450 million of 5.75% senior notes due 2022 and $96.3 million under senior credit facilities; cash less total debt was approximately $422.8 million. A $200 million revolving facility was available, subject to $2.8 million of letters of credit. The company reported compliance with debt covenants.
Business trends and changes versus prior periods
- Revenue growth reflected a shift toward higher-growth data and business services. Q3 residential data revenue rose 18.8% and business services 13.2%; residential video fell 9.1%, residential voice 12.3%, and advertising 11.2%.
- For the nine months, residential data revenue increased 18.3% and business services 12.6%; residential video declined 12.6%, residential voice 12.6%, and advertising 9.4%.
- Residential data growth benefited from a late-2015 rate increase, fewer package discounts, higher-tier subscriptions, and customer growth. Business-services growth reflected increased sales to small, medium-sized, and enterprise customers.
- Over the 12 months to September 30, residential video customers declined 13.8% and residential voice customers 12.8%; residential data customers grew 1.9%, and business customer relationships grew 9.6%. Total customer relationships declined 1.4%.
- Nine-month operating costs excluding depreciation and amortization decreased 2.7%, principally from lower programming costs as video customers declined. SG&A fell 8.9%, including lower billing-system processing costs and personnel costs, partly offset by higher compensation and acquisition-related costs.
Outlook, risks, and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects residential data and business services growth to continue, while video and residential voice revenue are expected to decline. It expects a significant portion of current broadband and infrastructure projects to be completed by year-end 2016, potentially freeing cash for other uses.
- Management said cash, operating cash flow, and credit facilities should support operations, planned capital spending, quarterly dividends, and repurchases for the next 12 months, subject to future performance and market conditions.
- Q3 included a $4.2 million net gain on sale of a cable system, contributing to other income; the company reported $6.8 million of sale proceeds for the nine months. It also acquired a cable system for $0.8 million during the period.
- The effective tax rate was 48.6% in Q3 and 40.0% for the nine months, above prior-year rates. The company attributed the increase principally to $4.1 million of adjustments concerning pre-spin deferred-tax misstatements, a prior-period state tax audit, and other prior-year tax calculations, plus a $0.7 million state apportionment estimate adjustment.
- Key risks include competition from telephone companies, satellite, overbuilders, and online video providers; programming and retransmission costs; technology and network security; regulation and franchise renewals; and the company’s ability to grow business services. The FCC’s broadband Open Internet Order was upheld by a federal appeals court, with an en banc rehearing petition pending at the filing date.
- Management said existing legal matters were not expected to materially affect the company. No material changes to previously disclosed risk factors or internal financial controls were reported; disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether continued data and business-services growth can offset video and voice subscriber losses, and how the changing customer mix affects margins.
- Whether infrastructure spending moderates as planned after 2016, and whether operating cash flow supports dividends and share repurchases alongside debt service.
- The sustainability of reported earnings growth after excluding the cable-system sale gain and considering elevated tax expense and acquisition-related costs.
- Debt covenant headroom, scheduled term-loan amortization, and refinancing requirements, including the large note maturity in 2022.
- Comparability of 2015 results, given the July 2015 spin-off and prior GHC cost allocations; also confirm the company’s non-GAAP Adjusted EBITDA definition and reconciliation.