Cable One, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Cable One became an independent, NYSE-listed company on July 1, 2015, following its spin-off from Graham Holdings Company (GHC). Historical results before the spin-off reflect GHC allocations and may not represent standalone costs or future performance.
Business context and financial results
Cable One provides video, data and voice services to residential and business customers in 19 states. Management is prioritizing higher-margin residential data and business services while deemphasizing video and voice.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $198.2 million | $199.7 million | $603.8 million | $613.3 million |
| Operating income | $39.0 million | $36.6 million | $110.7 million | $119.4 million |
| Net income | $19.4 million | $69.2 million | $63.0 million | $120.4 million |
| Diluted EPS | $3.30 | $11.84 | $10.75 | $20.61 |
| Adjusted EBITDA (non-GAAP) | $77.4 million | $72.9 million | $229.7 million | $226.9 million |
| Free cash flow (company-defined, non-GAAP) | $46.0 million | $20.6 million | $139.0 million | $96.1 million |
Operating margin was approximately 19.7% in Q3 2015 versus 18.3% in Q3 2014, and approximately 18.3% for the first nine months of 2015 versus 19.5% in 2014 (calculated from reported figures). The sharp year-over-year net income decline chiefly reflects the prior-year $75.2 million gain on sale of wireless spectrum and 2015 interest expense, rather than a comparable fall in operating income for the quarter.
Revenue trends and material changes
- Q3 revenue fell 0.7%; nine-month revenue fell 1.6%. Residential video revenue declined 6.9% in Q3 and 7.9% year to date; residential voice declined 21.1% and 20.7%, respectively.
- Residential data revenue grew 10.2% in Q3 and 9.7% year to date. Business services revenue grew 15.2% and 16.2%, respectively.
- Management attributed video and voice declines mainly to subscriber losses and competition. Video price increases and reduced discounting partly offset video customer attrition. Advertising revenue also declined as the video audience shrank.
- Q3 operating income increased 6.6% as lower operating and SG&A costs more than offset higher depreciation. Nine-month operating income decreased 7.3%, reflecting lower revenue and higher depreciation and SG&A, partly offset by lower operating costs.
- Adjusted EBITDA rose 6.2% in Q3 and 1.2% year to date. Company-defined free cash flow increased, with lower capital expenditures a significant contributor.
Cash flow, debt and liquidity
- Nine-month cash from operations was $194.7 million, compared with $152.0 million in 2014. Management said the increase was primarily associated with increases in income taxes payable and accounts payable and accrued liabilities.
- Cash paid for property and equipment was $103.4 million for the nine months, versus $131.1 million a year earlier. The company separately reports $90.7 million of capital expenditures under its NCTA presentation; the filing distinguishes cash payments from assets acquired, and the figures should not be treated as identical.
- At September 30, cash and cash equivalents were $144.5 million; working capital was reported as a surplus of $57.4 million. Current and long-term debt totaled approximately $549.7 million, implying net debt of approximately $405 million based on reported cash.
- Debt included $450 million of 5.75% senior unsecured notes due 2022 and a term loan with $99.4 million outstanding. A $200 million revolving facility was available; the filing does not report a revolver balance. The credit facilities are secured by substantially all assets of the company and subsidiary and include leverage covenants.
- Cash increased substantially during the period following the financing transactions. The $450 million notes proceeds funded a one-time dividend to GHC in connection with the spin-off.
Outlook, risks and unusual items
- Management stated that cash, credit facilities and operating cash flow were expected to support the current operating plan, planned capital expenditures and quarterly dividends for the next 12 months, subject to operating performance and other conditions. No quantified earnings or revenue guidance was provided.
- Management expects residential data and business services growth to continue, while video and residential voice revenues are expected to decline. It expects significant near-term broadband and network investments to be completed, potentially freeing cash otherwise used for those projects.
- The board authorized up to $250 million of share repurchases, capped at 600,000 shares. By September 30, 14,203 shares had been repurchased for $5.9 million. A $1.50-per-share quarterly dividend was approved in November 2015.
- Key stated risks include competition, programming and retransmission costs, regulation of broadband and other services, franchise renewals, network and information-security risks, and execution of business-services growth and capital plans. The company said existing legal proceedings were not expected to have a material effect and reported no material changes to previously disclosed risk factors.
- The FCC’s Title II broadband regulatory approach was identified as an area of uncertainty. Management noted that future regulatory changes could affect operations.
Important facts for investors to verify
- Reconcile customer counts: the notes report 380,807 video, 496,865 data and 130,775 voice customers, while the MD&A customer table reports different counts. The filing describes a new billing system and changed counting conventions, and says comparative counts were not adjusted.
- Assess the sustainability of growth in data and business services against continued video and voice customer attrition, including the effects of billing-system changes on reported customer metrics.
- Review debt covenants, leverage and interest-rate exposure, and confirm available revolver capacity; debt service and secured-credit terms affect financial flexibility.
- Distinguish GAAP operating cash flow and cash capital spending from management’s non-GAAP free cash flow measure, which excludes specified items and is defined by the company as Adjusted EBITDA less capital expenditures.
- Consider standalone cost comparability: pre-spin results include GHC allocations, while post-spin periods include new debt, benefit plans and public-company compensation costs.