Cable One, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Cable One provides residential and business broadband, video and voice services across 24 states, serving approximately 1.1 million customer relationships and passing 2.7 million homes and businesses.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $424.0 million | $429.1 million | $845.9 million | $855.8 million |
| Operating income | $135.0 million | $121.1 million | $267.1 million | $272.3 million |
| Net income | $55.2 million | $69.2 million | $112.7 million | $240.7 million |
| Diluted EPS | $9.36 | $11.11 | $18.98 | $38.05 |
| Adjusted EBITDA | $231.3 million | $227.5 million | $460.1 million | $454.0 million |
| Operating cash flow | $169.6 million | $164.4 million | $331.4 million | $353.1 million |
| Capital expenditures | $81.5 million | $107.3 million | $177.6 million | $206.7 million |
Q2 operating margin was approximately 31.8%, compared with 28.2% a year earlier. Adjusted EBITDA is a non-GAAP measure and is not equivalent to cash available for discretionary spending.
Revenue trends and material changes
- Q2 revenue fell 1.2%; first-half revenue also declined 1.2%. Residential data revenue grew 5.8% in Q2 and 5.6% for the half, supported by higher-tier subscriptions and customer migrations to premium tiers.
- Residential video revenue declined 22.0% in Q2 and 19.5% for the half as subscribers fell; residential voice revenue declined 11.3% and 14.8%, respectively. Business services revenue was nearly flat.
- At June 30, residential data subscribers were down 0.4% year over year, video subscribers down 28.3%, and voice subscribers down 14.1%. Total customer relationships decreased 2.3%; homes passed increased 1.6%.
- Q2 operating income rose 11.6% despite lower revenue, primarily as operating costs and SG&A declined. Lower programming costs contributed to the expense reduction, alongside lower insurance and property-tax costs. First-half operating income decreased 1.9%.
- Net income declined 20.2% in Q2 and 53.2% for the first half. Comparability was affected by higher interest expense and equity-method investment losses. First-half 2022 also included a $90.9 million non-cash gain on the MBI option, a $22.1 million non-cash gain on the Clearwave Fiber contribution, and a $13.8 million gain on business sales; 2023 included a $12.3 million non-cash Point Broadband valuation gain.
Cash, debt and liquidity
- Cash and cash equivalents were $160.7 million at June 30, 2023, down from $215.2 million at December 31, 2022. First-half operating cash flow was $331.4 million; investing cash outflow was $199.5 million and financing cash outflow was $186.2 million.
- Debt carrying value, including current maturities, was approximately $3.75 billion. The company had $1.78 billion of term loans and $438 million drawn on its $1.0 billion revolving facility, leaving $562 million available. It reported compliance with debt covenants.
- February refinancing upsized the revolver, extended its maturity to 2028, extended certain term-loan maturities to 2029 and increased spreads on two term loans. Borrowings and a term-loan upsizing funded repayment of the $638.3 million Term Loan A-2. Variable-rate debt remains exposed to interest-rate changes; $1.2 billion was covered by interest-rate swaps.
- Interest expense increased 34.7% in Q2 and 35.7% for the first half, primarily due to higher interest rates. The company paid $80.1 million in cash interest during the first half.
- First-half share repurchases were $83.1 million. The Q2 dividend was $2.85 per share; management expected comparable quarterly dividends to continue, subject to Board approval. The company had $159.4 million of repurchase authorization remaining.
Outlook, risks and contingencies
- Management said cash, revolving credit availability and operating cash flow should support operations and expected funding needs over the next 12 months, while noting dependence on future performance and economic conditions.
- Management’s strategy emphasizes higher-margin residential data and business services, cost discipline, network investment and expansion, including DOCSIS 4.0 capabilities. It expects long-term growth in residential data and business services, but subdued recent residential data growth reflects macroeconomic headwinds and competition. Further declines in video and voice are expected.
- The company has a call option to acquire the remaining MBI interests through June 30, 2024; if it is not exercised, a put option may require purchase in July–September 2025. Cable One said it had not obtained the capital it believes would be necessary if either option is exercised. The option liability was $179.1 million at June 30, 2023; the ultimate purchase price is based on a formula tied to MBI adjusted EBITDA.
- Key risks include competition from fiber, fixed wireless and streaming providers; customer and video subscriber losses; programming costs; high leverage and floating interest rates; acquisition and investment outcomes; regulation; cybersecurity; and execution of network and systems projects. No material changes to previously disclosed risk factors were reported. The filing reported no legal proceedings expected to have a material adverse effect and no material impairments.
- In July 2023, after quarter-end, the company received $35.9 million from redemption of its Wisper investment and approximately $20.9 million gross proceeds from divesting its Tristar investment. It expected to fund the remaining $13.9 million Ziply investment in the second half of 2023.
Important facts for investors to verify
- Whether residential data growth and pricing can offset continuing video and voice subscriber and revenue declines.
- How much of the reported earnings and Adjusted EBITDA trend reflects recurring operations versus non-cash investment and option fair-value changes and other unusual items.
- Debt-service capacity and interest-rate sensitivity, including the impact of refinancing terms and the portion of variable-rate debt protected by swaps.
- Funding requirements and valuation assumptions for the MBI call or put option, and any resulting effects on leverage, liquidity or shareholder returns.
- Execution and returns on network capital expenditures, while balancing investment needs against dividends and share repurchases.