CABO - NYSE

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One Second Quarter Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Jordan Morkert. You may begin.

Good afternoon, and welcome to Cable One's Second Quarter 2025 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I would like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties, including statements regarding future broadband revenue, customer growth, connects and churn rates, new product rollouts, anticipated cost savings and other benefits to be derived from our billing system migration and our other investments in growth enablement platforms, anticipated benefits from our mobile service pilot program, future cash flow, ARPU and capital expenditures, future levels of competition, potential stock buybacks, our ability and sources of capital to fund the retirement of our 0% convertible notes in 2026, the estimated MBI call purchase price, MBI's future debt levels, the anticipated after-tax proceeds from the expected monetization of certain investments, expected cash tax savings to be realized as a result of the recently passed federal tax bill, our CEO succession process and our future financial performance, capital allocation policy, leverage ratios and financing plans. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call in today's earnings release and in our SEC filings, including our annual report on Form 10-K and our forthcoming second quarter 2025 quarterly report on Form 10-Q. Cable One is under no obligation and expressly disclaims any obligation, except as required by law to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles or GAAP. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net. Joining me on today's call is our President and CEO, Julie Laulis; and Todd Koetje, our CFO. With that, let me turn the call over to Julie.

Thank you, Jordan, and good afternoon, everyone. We appreciate you joining us for today's call. This quarter's results were influenced by a combination of internal actions we took during the period as well as a few external factors. These included some pricing and packaging adjustments for a subset of our customers, double the typical volume of promotional roll-offs, continued competitive headwinds and seasonal softness in our college markets. Against that backdrop, residential broadband revenue increased on a sequential basis by 1.9% compared to the first quarter, driven primarily by higher ARPU. Business data revenue was $57.4 million, and consolidated adjusted EBITDA was $203.2 million, both results consistent with Q1 levels. Despite the residential broadband customer losses we experienced in the quarter, we're encouraged by the sequential improvement in connect throughout the first half of the year with continued month-over-month growth in June, representing the first month during 2025 with a year-over-year increase in connects. We believe our drive towards simplified pricing, segmented marketing campaigns and value-enhancing product and service offerings is laying the groundwork for stronger subscriber uptake and improved operating performance over time. In addition, the completion of the final phase of our billing conversion marks a key milestone in our multiyear investment in growth enablement platforms, positioning us for more agile product launches and deeper customer engagement going forward. I'll first review residential broadband customer trends. Residential data customers declined by 13,000 in Q2, driven by continued softness in connects and elevated churn. However, as I just noted, we have seen sequential month-over-month growth in connect every month this year through the end of Q2. This trend suggests our new products and go-to-market strategies are showing early signs of positive impact. Elevated disconnects this quarter were driven by customer response to recent segmented pricing changes, churn arising from promotional roll-offs and seasonal churn in our college markets. Completing the final phase of our AutoPayPlus rollout also resulted in some incremental churn. But AutoPayPlus which includes a $5 surcharge for nonenrolled customers has been a positive program for us by either increasing ARPU or reducing billing costs and improving retention over time. Broadband revenue increased on a sequential quarter-over-quarter basis, driven by a $2.39 increase in ARPU. This was due to the impact of segmented pricing changes as well as promotional expirations, greater adoption of value-enhancing services like SecurePlus and Ultimate Wi-Fi and as I noted above, the completion of the rollout of our AutoPay program. Selling to premium speed tiers of gig or above remained high at 46%, reinforcing customer demand for higher speed plans and further supporting ARPU. Looking ahead, we expect ARPU to remain stable for the remainder of the year. We're seeing early traction with Lift Internet, which is helping us reach value-conscious customers in a financially sustainable way. Flex connected option has not met our expectations to date, but we continue to believe that both FlexConnect and Lift will play an important role in today's competitive environment. These products compete directly on price with cellphone internet while offering a superior experience with unlimited data, consistent speeds and greater reliability. Key differentiators given that our customer average data usage is now nearly 800 gigabytes per month and over 27% of our customers regularly surpass a terabyte of data. To further elevate our customers' connected home experience, we recently launched Tech Assist, a $10 per month support service that offers expert help with a wide range of Wi-Fi connected devices outside of our internet equipment. From setup to troubleshooting and ongoing support Tech Assist provides customers with convenient, reliable assistance for tech issues related to smart thermostats, doorbells, security cameras and more. While we don't expect Tech Assist to generate material revenue in 2025, it reflects our focus on delivering customer-centric innovation and practical value-added services that simplify daily life for our customers. We are optimistic it will begin to generate meaningful results in 2026 and beyond. Turning to competitive dynamics. Fiber-to-the-home overbuild largely from incumbent telco providers now represents approximately 53% of our passings. In addition, cellphone internet competition is nearly ubiquitous across our footprint. While we expect competitive intensity to persist, we believe our neighborly service, enhanced platforms, an evolving set of products position us to defend and grow share over the long term. We're continuing to fight hard for every new customer while staying focused on retaining our existing ones. While we're seeing some encouraging signs, steady month-over-month growth in connects during the first half of the year, stable ARPU and early momentum from new products, given the customer losses we experienced in the second quarter, we do not expect to grow total residential broadband customers in 2025. In addition, we currently expect total residential broadband revenue for 2025 will be flat or decrease modestly for the full year as compared to 2024. We remain focused on driving innovation that simplifies the customer experience and enhances operational efficiency. One example is Ask Tommy, our AI-powered assistant that not only handles tasks typically managed by our field techs like contacting customers with appointment windows and rescheduling when necessary, but also provides tech with AI-driven technical expertise to help diagnose and resolve issues more quickly. This tool reflects the kind of everyday workflows we're beginning to automate allowing us to better allocate resources and dedicate our highly trained technicians to more complex service needs. This is just one example of how we're using AI in practical impactful ways. Earlier this month, we executed the final phase of our billing system migration, transitioning Hargray and legacy Sparklight customers onto our unified platform. This initiative consolidated more than 30 legacy programs, enabling all acquired companies to operate under the Sparklight brand. This project was central to our ongoing transformation. Being on a unified platform will significantly enhance the customer experience by streamlining our rate structures across markets, enabling more flexible pricing and allowing us to respond more quickly to competitive changes. It also delivers a faster, more intuitive interface for our customers. While this represents a significant step forward, there are a number of post-migration work streams to be completed before we fully realize the benefits of this transformation. We expect the billing migration will result in several million dollars in annual cost savings starting in late 2025, as we further leverage the system for pricing, product and service innovation. We're excited to share that we've signed an agreement with a mobile virtual network enabler, or MVNE, to pilot mobile service in several of our markets. This marks the start of a focused initiative to explore whether mobile can complement our wired broadband product by delivering added convenience, greater flexibility and stronger overall value for customers. By offering connectivity both inside and outside the home, we aim to strengthen long-term relationships and improve retention while meeting more of our customers' everyday needs. Our belief has been that mobile makes sense only if a few key conditions are met: improved wholesale economics, better mobile network reliability standards in our markets, mature enablement platforms and a fully featured product with the potential to attract value-conscious customers. The shifting market dynamics and advancements in technology have improved the economic viability of mobile, making this a good time for us to launch this pilot program. Mobile has the potential to enhance customer lifetime value, reduce churn and support packaging opportunities that reinforce the strength of our core broadband business. We'll take a disciplined approach on this new initiative and see what we learn as the pilot progresses. To wrap up, while competition is fierce and there's a lot more work to do, we believe we are taking the right strategic actions to grow the business over the long term. We're seeing better sequential monthly trends in customer-add activity over the first half of the year, early momentum from some of our new product lines, and we anticipate greater efficiencies and improved customer experience from our unified billing platform going forward. Most importantly, we believe we are building a growth engine thoughtfully, and recognize that continued transformation will be required to fully realize our long-term ambitions. And now Todd, who will provide a recap of our second quarter financial performance.

Thanks, Julie. Total revenues for the second quarter of 2025 were $381.1 million compared to $394.5 million in the second quarter of 2024. Residential video revenues drove the majority of the decrease in total revenues with a year-over-year reduction of $9 million or 15.8% due to continued video subscriber attrition. Residential data revenues decreased $1.1 million or 0.5% year-over-year, driven by a 3.2% decline in subscribers, partially offset by a 2.4% increase in ARPU. However, on a sequential basis, residential data revenues increased $4.2 million or 1.9% over the first quarter, driven by a 3% increase in ARPU. Business services data revenues grew 1.2% year-over-year in Q2 2025, driven by continued strength in our high-value fiber and carrier segments. These high-performing categories benefited from robust sales activity, increased connection volumes and the ramp of previously announced multimillion-dollar long-term contracts. On a sequential basis, business data revenues increased 0.2%. Operating expenses were $102.4 million or 26.9% of revenues in the second quarter of 2025 compared to $105.8 million or 26.8% of revenues in the prior year quarter, with the decrease driven largely by a reduction in programming costs. Selling, general and administrative expenses were $92 million for the second quarter of 2025 compared to $90.8 million in the prior year quarter. SG&A as a percentage of revenue was 24.1% for Q2 of 2025 compared to 23% for Q2 of 2024, with the increase driven largely by investments in growth enablement platforms, partially offset by a reduction in labor costs. Taken together, these platforms and ongoing operating efficiencies are expected to generate annual run rate cost savings of approximately $15 million across both operating and SG&A expense, including the anticipated savings from our billing system migration. While some of these savings may be offset by inflationary cost pressures or reinvestment in growth initiatives, we expect a meaningful net benefit over time. During the quarter, triggered by a decline in the price of our common stock, we conducted an impairment assessment of our intangible assets and goodwill and recognized a combined noncash impairment charge of $586 million. This charge doesn't impact our cash flows, operational strategy or growth initiatives. Adjusted EBITDA of $203.2 million was 53.3% of revenues in Q2 of 2025. In Q2 of 2024, adjusted EBITDA was $212.4 million or 53.8% of revenues. Capital expenditures were $68.4 million in Q2, a decrease of $3.2 million or 4.5% year-over-year. During the quarter, we invested $8.7 million of CapEx for new market expansion projects and $2.2 million for integration activities. Adjusted EBITDA less capital expenditures or free cash flow was $134.8 million in the second quarter of 2025, representing 66.4% of adjusted EBITDA compared to $140.8 million and 66.3% in the prior year. We will continue to evaluate how best to deploy the meaningful free cash flow generated by our business, with a steady focus on long-term growth and disciplined conservative balance sheet management. With the passage of the tax bill earlier this month, we expect to realize approximately $40 million of cash tax savings in 2025 and approximately $120 million of aggregate cash tax savings through 2027 based on our preliminary estimates and available information. We used a portion of our substantial free cash flow in addition to cash savings from our dividend suspension to pay down over $70 million of debt during the quarter. On top of nearly $5 million of scheduled term loan amortization payments, we voluntarily paid down $45 million of revolver borrowings and opportunistically repurchased over $21 million of senior notes and term loan borrowings at attractive discounts to face value. This brings our gross debt repayment during the last 2 years to well over $0.5 billion, excluding the $175 million revolver draw related to the amendment to our MBI strategic partnership late last year. In addition, we repaid another $25 million of revolver borrowings earlier today. In addition to disciplined debt repayment and deleveraging, we may opportunistically and prudently buy back shares under our remaining $143 million authorization, dependent on the trading level of our common stock market conditions and other factors. As of June 30, we had approximately $153 million of cash and cash equivalents on hand, and our total debt balance was approximately $3.5 billion consisting of approximately $1.7 billion in term loans, $920 million in convertible notes, $633 million in unsecured notes, $228 million of revolver borrowings and $3 million of finance lease liabilities. We ended the quarter with substantial committed liquidity available under our $1.25 billion revolving credit facility, providing meaningful financial flexibility. Our weighted average cost of debt for the second quarter of 2025 was 3.9%, and our net leverage ratio on a last quarter annualized basis was 4.1x. Nearly $2.8 billion of our $3.5 billion of debt contains fixed or synthetically fixed base interest rates that are substantially below current market rates. Between our free cash flow generation and the substantial available capacity under our revolving credit facility, we expect we will be able to fully retire our 2026 convertible note maturities without needing to arrange for additional financing. Even so, we will continue to monitor the capital markets in order to be in a position to take advantage of attractive opportunities should they arise. Turning to MBI. Now that the June 30 measurement period has concluded, we've narrowed our estimated range for the purchase price if the call or put option is exercised. We now expect the purchase price to fall between $460 million and $510 million, and the amount of MBI's total net indebtedness at the time it is acquired will be between $845 million and $895 million. If the put option is exercised, we would anticipate the closing to occur on October 1, 2026. Over the last 2 years, we've completed or announced the monetization of 5 equity investments, and we expect to continue to evaluate strategic options for our remaining equity investments. Earlier this month, we monetized our stake in Metronet and our monetization of

Thanks, Todd. Before we open it up for questions, I want to briefly touch on the CEO succession plan we announced in the second quarter. After 26 years with Cable One and more than 40 years in the industry, I will be retiring later this year upon the earlier of the appointment of my successor for year-end. I will continue to serve as CEO until my retirement and will remain as a senior adviser through 2026 to support a smooth transition. The Board has retained a leading executive search firm and is conducting a comprehensive search process for my successor that includes both internal and external candidates. This process is designed to ensure a stable transition and execution of our long-term growth strategy. With that, we're ready for your questions.

[Operator Instructions] Your first question comes from the line of Brandon Nispel with KeyBanc.

Julie, you mentioned that competitive overlap with fiber now stood at 53%. I think that's up quite a bit from the last disclosures. I was hoping you could talk a little bit about the net adds or losses that you're seeing in fiber versus non-fiber markets, trying to understand if there's a difference or if some of the competitive losses are just sort of going to fixed wireless.

Sure, Brandon. Thanks. Actually, last quarter, we said that our overlap with fiber was 50%. So we went from 50% to 53% during the course of the quarter. And in terms of fiber versus non-fiber, we don't really see -- fiber is broken down into the big guys who are moving relatively slowly, and then some smaller folks who are making some incursions into small parts of small markets. So based on competitive intelligence that we have, our losses are coming from a lack of connects that are likely being taken by cellphone internet. During the quarter, we had connects that were higher each month during the year and June represented a year-over-year month where connects were actually higher in '25 than '24. So we feel relatively good that we're making progress there, albeit not as high as we would like to see. We also had elevated churn, and I think going through examples will help illustrate how the activities that we talked about in the script, those internal actions that we mentioned, they affected both ARPU and churn. So I'll give you some examples to illustrate. We did do some pricing changes for a subset of customers. And as we've talked about actually quite a bit in the past, we take a targeted approach there where some customers' rates are going down. Some customers' rates are going up. We also had pricing normalization as we've gone through our billing migration and harmonized all the brands into Sparklight. We had the roll-off of promotional discounts. And this quarter, promotional discounts were roughly double of our typical volume. And what happens when we do the promos as we get a higher response rate. So that's good. We're bringing more customers in the door. But there will be some attrition when they roll to higher rates. Now this cohort actually retained incredibly well, actually higher than our base, and we're going to keep an eye on them to see how they continue to retain, but you can see where those promo roll-offs would have created churn and a bump in ARPU. We also have seen broader adoption of our value-added services like SecurePlus and Ultimate Wi-Fi. And our gig-plus plans are continuing to sell in at 46%. So that's something on the ARPU side. And then the last thing that affected churn, but also ARPU is the completion of our final phase of our AutoPay program. And so we had the remaining 1/4 of our customers who had not been exposed to that because they were in our family of brands. And what happens when we roll this out is we see the highest non enrollment rate. That means they are being charged that $5 surcharge. But over time, people adopt into the AutoPay program. And so thus their monthly rate will be coming down. So I hope that helps to explain.

Yes. Great color. I was hoping maybe then as a follow-up, if you could help us understand what promo roll-off looks like going forward. And given that you saw higher churn from sort of promo roll off, are you implementing any sort of unique same tactics that might help churn and save those customers?

Great, great questions. Yes. So these are promos that were affected in 2024. And through the remainder of the year, we expect this dynamic to remain elevated. And we do have -- actually, when I've talked about the team in the past, I talked about folks that we have brought on board who come from highly competitive environments or even entrepreneurial environments and the person who is in charge of our retention tactics is hard at work. And again, at this point in time, Brandon, these -- this cohort is retaining at a higher level at its point in time in its life cycle than our base. So it sort of suggests that it's a right-sized value for them, I would say.

Your next question comes from the line of Sam McHugh with BNP Paribas.

First on broadband. Obviously, we've seen an acceleration in losses again, but the ARPU strong. It seems like you're still struggling to balance the two. You talked about FlexConnect not quite meeting expectations. So when we think about this, what's your priority? Is it subscribers? Or is it ARPU, like which is the #1 priority? Secondly, you talked about ARPU being stable. Just to clarify, are you talking about year-over-year now or sequentially from 2Q.

Thanks, Sam. When it comes to our priority, it is, in fact, a truism that we are attempting to balance both. But again, there are puts and takes in each one of our markets. It's one of the positives of having systems in 24 states that have different dynamics going on at a time. So again, while there's increases in some markets, there's decreases in others or maybe there's different tests going on with all-in pricing, that sort of thing. When we're talking about ARPU being steady, we're seeing from this point forward through the rest of the year, we plan -- we assume that ARPU will be stable. For color on FlexConnect, I'll turn it over to Todd.

Yes. And Sam, on the stability side, as Julie just said, we've been really close to the mean now for the last 4 quarters, right? So quarter-to-quarter ARPU with some of the promotional dynamics, with some of the segmented rate adjustments that we've made is going to have some change. But when we talk about stability, we obviously look at that as you've heard us say before through the lens of a longer-term period than next quarter. But as Julie said, for the rest of the year, we expect ARPU to remain stable. We don't anticipate large fluctuations, but rather steady performance. As it relates to Flex, it did -- it didn't meet our expectations in terms of additional connects, additional gross adds for the quarter. As you recall, we were launching that later in the quarter. At the same time, we were prioritizing the best execution that we needed to complete the migration of our billing system as well as the revamp of our website and our digital ecosystem. We basically identified that getting those two core platform implementations complete was going to give us a better foundation for launching that product. And so we're actively right now refining the go-to-market on the back end of those two critical implementations and readying a relaunch of that, which will occur in Q3. We'll put increased marketing behind that, increased branding support behind that. And we still expect that FlexConnect will be an important lever in our broader segmentation strategy for new customer acquisition, specifically with that value-conscious customer base.

I'm going to take a small follow-up as well. AT&T has been talking about accelerating with Internet Air in the second half of this year. I don't know in your markets, whether you've seen a noticeable change from kind of how they go to market on copper saves?

Yes. It is a good question, and it is a relevant one. We've talked about that really for the last couple of quarters because in some of the smaller markets specifically, where AT&T has not upgraded their copper network to fiber, they have been very aggressive with that product, whether that's a save or an interim strategy, you'll be better to analyze that, but that is a product that we believe a solution like FlexConnect can go head-to-head with in those environments. Their upgrades have slowed. But counter to that, their pressure on that fixed wireless cell phone internet product have accelerated.

Your next question comes from the line of Sebastiano Petti with JPMorgan.

Nik on for Sebastiano. It's great to hear the pilot for mobile. You guys mentioned that the economic viability of the offering has improved and that's kind of the driving factor. But I'm also curious if you would characterize the strategy as a competitive response in any way. It seems like all the big telcos are increasingly pushing convergence. So I'm wondering if you guys kind of see that at a go- to-market level? And then secondly, on mobile as well. I mean, any initial thoughts around go-to-market? Would we expect something like free lines, for example, like some of your cable peers do?

Thanks, Nik, it's Julie. It isn't just the improving economics, it is also the stability of the mobile networks in all of our markets, which we had an issue with heretofore as well as getting a fully rounded product that is to say that it was fully featured in that the enablement platform was tried and true. So all of those factors are coming into play now, making us feel comfortable that this is something that would be in alignment with the Sparklight brand image. It would not cause it any harm. . When it comes to convergence and what we think we can -- this can do, we see it as adding a piece of -- an ease of life to our customers, quite honestly, and having a product that meets their needs and hopefully helps with our main product, which is broadband. So by bundling the two together, we, of course, are hoping that it is a value to our customers and helps our broadband service as well as offers us an opportunity for enhanced profitability. I think that's the lens through which we see convergence is through the lens of profitability. In terms of go-to-market, what I can tell you is that we expect to be live before customers in our pilot markets by the end of the year. And you can imagine that we will be testing many, many different things to learn as we go.

Your final question comes from the line of Frank Louthan with Raymond James.

On the billing system conversion, when will that have finished going through its first full billing cycle? And are you confident at this point that it's -- you're not dropping customers or it's going to have any other issues like you had earlier this year?

Frank, it's Julie. I don't think that we've had any problems with our first phase of our billing migration nor the second. We've gone through a complete cycle, meaning all four cycles of phase 2. And so no problems with billing customers, with reporting, with provisioning. We do have follow-ups because almost everything flows from that. So every piece of provisioning, we will be down turning multiple different billing systems, different provisioning systems. We'll be going from five websites to one. There's still work to be done, but the billing migration is done. And while very, very tough, it is going well.

This concludes the question-and-answer session. I would now like to turn the call back over to Julie Laulis for closing remarks.

Thank you, Lacey. This is a dynamic time for our industry, and I am proud of how our associates continue to step up, execute with discipline and stay focused on providing great experience for our customers. I remain grateful to and thankful for them and all their hard work. Thanks again for your time and interest in Cable One.