Cable One, Inc. — FY2019 Form 10-K and Q4 snapshot
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report; fourth-quarter figures below are unaudited. Cable One provides broadband, video and voice services in 21 states, serving approximately 907,000 residential and business customer relationships across about 2.3 million homes passed.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,168.0 million | $1,072.3 million | +8.9% |
| Operating income | $310.5 million | $267.9 million | +15.9% |
| Net income | $178.6 million | $164.8 million | +8.4% |
| Diluted EPS | $31.12 | $28.77 | +8.2% |
| Adjusted EBITDA (non-GAAP) | $569.0 million | $500.8 million | +13.6% |
| Operating margin | 26.6% | 25.0% | +1.6 percentage points |
| Net margin | 15.3% | 15.4% | −0.1 percentage points |
FY2019 operating cash flow was $491.7 million, versus $407.8 million in 2018. Capital expenditures were $262.4 million, up from $217.8 million; operating cash flow less capital expenditures was approximately $229.4 million. Investing cash outflow was $1,134.2 million, principally reflecting acquisitions and higher capital spending.
At year-end, cash and cash equivalents were $125.3 million and total debt, including finance leases, was $1,759.0 million. Outstanding term loans were $1,753.0 million, with $343.3 million available under the revolving facility. The company reported compliance with all debt covenants. Interest expense rose 18.7% to $71.7 million. A 100-basis-point increase in LIBOR was estimated to add $9.0 million to annual interest expense, based on year-end debt exposure.
Q4 2019
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Revenue | $318.8 million | $269.9 million |
| Operating income | $88.5 million | $69.3 million |
| Net income | $53.6 million | $42.0 million |
| Diluted EPS | $9.32 | $7.34 |
Q4 2019 included Fidelity operations from its October 1 acquisition, as well as Clearwave; the quarter-to-quarter comparison therefore includes acquisition effects.
Business mix and material changes
- Residential data generated $547.2 million, or 46.9% of FY2019 revenue, up 11.0%. Residential video generated $335.2 million, or 28.7%, down 2.4%. Business services generated $204.5 million, or 17.5%, up 31.1%; residential voice generated $43.5 million, or 3.7%.
- Growth reflected organic data and business-services gains, Clearwave and Fidelity, residential video rate changes, and certain business modem rental charges. Clearwave and Fidelity contributed $32.5 million of the $48.5 million increase in business-services revenue.
- Residential data PSUs rose 15.7% and business-services PSUs 22.4%; residential video PSUs fell 3.9%. Legacy Cable One and NewWave residential video subscribers declined 12.4% year over year.
- Data and business services together represented 64.4% of revenue, versus 60.5% in 2018. Management said their Adjusted EBITDA margins were approximately seven and nine times residential video’s, respectively; the widening differential reflected acquisitions and declining video margins.
- Clearwave was acquired in January for $358.8 million and Fidelity in October for $531.4 million. Acquisition-related costs were $9.6 million. Revenue and balance-sheet comparisons are affected by these transactions.
Outlook, risks and unusual items
- Management expects continued growth in residential data and business services, supported by network investment, cost management and expansion of broadband offerings. Gigabit service covered over 97% of homes passed; DOCSIS 3.1 deployment and further network upgrades were planned. The filing provides no specific numerical earnings or revenue guidance.
- Management expects residential video revenue and residential voice revenue to continue declining, citing escalating programming and retransmission costs, streaming alternatives and substitution by wireless voice. Video programming costs and retransmission fees equaled 58%–65% of residential video revenue in each of the prior three years.
- Competition, technology change, cyber and network disruption, privacy obligations, vendor dependence, franchise renewals, regulation, pole costs and acquisition integration are material risks. The company disclosed a 2019 information-security incident that could affect personal information of some current and former associates and related individuals.
- The company planned ERP implementation within the following 12 months and acknowledged potential disruption. It began rebranding as Sparklight in 2019, with further rebranding planned; costs and benefits remain uncertain.
- FY2019 unusual financing items included a $6.5 million call premium and debt issuance cost write-offs related principally to redeeming $450.0 million of 5.75% notes. Two interest-rate swaps covered $1.2 billion of variable-rate debt; their year-end fair-value liability was $89.7 million, with a $67.5 million after-tax loss recorded in other comprehensive income.
- The company reported no material legal proceedings and no goodwill or indefinite-lived intangible impairment in 2019. Surety bonds and letters of credit supporting franchise and other obligations totaled $18.3 million; management did not expect payments. The auditor and management concluded internal control over financial reporting was effective, but Clearwave and Fidelity were excluded from the control assessment and audit.
Important facts for investors to verify
- Separate organic growth from the contribution of Clearwave and Fidelity, particularly for revenue, EBITDA, customer counts and reported margins.
- Track data and business-services customer growth against video and voice attrition, and assess whether continued video rate increases offset subscriber losses and programming costs.
- Review acquisition integration, expected synergies, remaining purchase-price allocation adjustments and the effect of acquired intangible amortization.
- Assess leverage, debt maturities—particularly the disclosed 2024 principal concentration—variable-rate exposure, swap economics and liquidity after capital spending and dividends.
- Monitor capital expenditure returns, DOCSIS 3.1 deployment, ERP execution, cybersecurity remediation and costs or obligations arising from regulation and franchise renewals.
- Consider that Adjusted EBITDA is a non-GAAP measure and does not deduct capital spending, debt service or other required cash outflows; compare it with GAAP results and cash flow.