Cable One, Inc. — Q2 2020 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2020. Cable One provides residential and business data, video and voice services in 21 states. At quarter-end it served approximately 962,000 customer relationships. Results include Fidelity, acquired in October 2019, so year-over-year comparisons reflect both acquired operations and organic performance.
Financial and operating performance
Amounts are in millions except per-share, subscriber and percentage data. Margins are calculated from reported figures and are approximate.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $328.3 | $285.7 | $649.5 | $564.3 |
| Operating income | $90.7 | $74.1 | $183.4 | $141.8 |
| Operating margin | 27.6% | 25.9% | 28.2% | 25.1% |
| Net income | $62.5 | $36.4 | $131.9 | $75.1 |
| Diluted EPS | $10.63 | $6.35 | $22.66 | $13.13 |
| Adjusted EBITDA (non-GAAP) | $163.2 | $137.6 | $320.9 | $270.7 |
| Adjusted EBITDA margin | 49.7% | 48.2% | 49.4% | 48.0% |
- Revenue mix, Q2: Residential data revenue was $164.0 million, up 23.5%; business services was $58.5 million, up 17.5%. Video revenue rose 3.9% to $87.3 million and voice rose 13.2% to $12.1 million, with acquired Fidelity contributing to growth. Other revenue fell 23.5% to $6.4 million.
- Drivers and costs: Q2 revenue increased 14.9%, including $33.1 million from Fidelity. Organic data growth, higher customer gains, reduced discounting and premium-tier subscriptions supported results. Q2 operating expenses rose 10.8% and SG&A rose 8.1%; as shares of revenue, they improved to 32.3% and 19.8%, respectively. Higher depreciation and amortization partly reflected Fidelity and increased to $65.6 million.
- Six-month cash flow: Operating cash flow was $272.2 million versus $212.5 million. Investing cash outflow was $178.1 million, including $143.4 million of capital expenditures and a $27.2 million Nextlink investment. Financing cash inflow was $423.2 million, driven principally by the equity offering. Operating cash flow less capital expenditures was approximately $128.8 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Liquidity and debt: Cash and equivalents were $642.6 million at June 30, 2020, up from $125.3 million at year-end. Total debt carrying amount was $1.745 billion, including $1.739 billion of term loans; cash-adjusted debt was approximately $1.10 billion. The company reported $321.3 million available under its $350 million revolving facility, after letters of credit, and compliance with debt covenants. Term loans are principally LIBOR-based; $1.009 billion of scheduled maturities fall in 2024.
- Capital and shareholder returns: In May, Cable One issued 287,500 shares for net proceeds of $469.8 million, repaid a $100 million revolver borrowing and retained proceeds for general purposes, acquisitions and investments. Q2 dividends paid were $2.25 per share. The board subsequently approved a quarterly dividend of $2.50 per share, payable September 4, 2020.
Material changes, outlook and risks
- COVID-19: Management estimated pandemic-related actions and effects reduced Adjusted EBITDA by $14.9 million in Q2 and $16.5 million in the first half, mainly from waived overage and late fees, fewer reconnect and advertising revenues, slower small-business sales, higher labor costs and bad debt. Q2’s unusually strong residential data additions and some lower expenses largely offset the effects. The allowance for credit losses rose to $9.4 million from $1.2 million at December 31, 2019.
- Management expected some pandemic-related revenue reductions and elevated labor costs to continue into Q3 2020, partly offset by revenue from Q2 data additions. It highlighted uncertainty around customer growth, bad debt, expense normalization and the broader economy. No formal numerical earnings or revenue guidance is provided.
- The company continues to prioritize residential data and business services, broadband investment and rural-market acquisitions. It expects residential video and voice trends to remain pressured by streaming and wireless substitution, respectively. Gigabit service was available to approximately 97% of homes passed.
- The ERP implementation was delayed amid pandemic-related resource constraints; management planned implementation by summer 2021. The filing identifies execution and operational disruption risks.
- Subsequent events: Cable One acquired Valu-Net in July for a $38.4 million base price, closed a $25.3 million Wisper equity investment, and agreed to exchange its Anniston, Alabama system for a minority interest in Hargray, subject to approvals and closing conditions.
- Interest-rate swaps covering $1.2 billion of variable-rate debt had a combined reported liability of $214.5 million at June 30. Six-month unrealized cash-flow-hedge losses, net of tax, were $94.1 million and reduced comprehensive income; these losses are distinct from reported net income.
- The company reported no legal proceedings expected to have a material adverse effect and no material impairment charges in the first half. It cautioned that COVID-19, competition, programming costs, regulation, debt, interest rates, cyber risks and the ERP project could affect results.
Most important facts for investors to verify
- How much reported growth and margin improvement is attributable to Fidelity versus sustainable organic growth, particularly in residential data and business services.
- Whether strong Q2 data customer additions persist, and how customer collections, credit losses, waived fees and pandemic-related costs develop.
- Cash deployment after the share offering, including the Valu-Net and Wisper transactions, the proposed Hargray transaction, capital expenditures and dividends.
- Debt repayment capacity and exposure to LIBOR transition, swap fair-value changes and significant 2024 maturities.
- Progress toward the summer 2021 ERP implementation and the effects of the consolidated reporting-unit changes on future impairment testing.