Julia Laulis - President & CEO Kevin Coyle - SVP & CFO.

Frank Louthan - Raymond James Stephan Bisson - Wells Fargo.

Good morning, and welcome to the Cable ONE Second Quarter 2017 Earnings Report Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kevin Coyle, CFO. Please go ahead..

Thank you, operator. Good morning, and welcome to Cable ONE's Second Quarter 2017 Earnings Call. We're excited to have you with us this morning as we review our results. Before we proceed, I would like to remind you that today's discussion may contain forward-looking statements relating to future events and expectations.

You can find factors that could cause Cable ONE's actual results to differ materially from these projections listed in today's press release and in our recent SEC filings.

Cable ONE is under no obligation and, in fact, expressly disclaims any obligation to update 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. 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 with that, let me turn the call over to Julie..

Thank you, Kevin. Good morning, and we appreciate you joining us for our second quarter 2017 earnings call. I will review a few highlights and then hand it over to Kevin for a full recap of our financial performance.

Our second quarter yielded strong results as we continue to execute our strategy, with legacy Cable ONE operations demonstrating top line revenue growth, higher adjusted EBITDA and industry-leading margins. Our acquisition of NewWave closed on May 1, and we are pleased that its results are now contributing to our combined success.

Let me emphasize that only two months of NewWave operations are included in this quarter's earnings.

Our second quarter results included legacy Cable ONE residential HSD unit growth of 2% in what is typically our softest quarter and residential HSD revenue growth of nearly 7.5%, legacy cable and business customer growth of close to 8% and an increase in business revenues of almost 14% for the quarter.

Total revenues were $241 million compared to almost $205 million in the second quarter of 2016, largely as a result of more than $32 million contributions from NewWave operations. Adjusted EBITDA margin for the second quarter was 47%. Legacy CABO adjusted EBITDA margin would've been nearly 49%.

As I said earlier, Kevin will get into more detail on our results in a moment. Just last week, we announced our first dividend increase, a nearly 17% bump to $1.75 per share quarterly dividend or from $6 to $7 per share on an annualized basis.

As you've heard us say before, we look at our business through the lens of achieving sustainable profitability. We believe that is evidenced by our deliberate and thoughtful approach to various areas, including capital allocation, M&A and the operation of our business.

We believe that our strategy and long-term focus have helped us attain industry-leading adjusted EBITDA margins, and we are proud of the efforts of our associates to achieve those results. At Cable ONE, we strive to make our customers' lives easier. Recently, we enhanced our residential HSD product with the launch of WiFi ONE.

WiFi ONE is a major step in advancing that goal while further distinguishing us from other providers in our markets. This advanced Wi-Fi solution provides our customers with enhanced Wi-Fi signal strength and extends and improves the Wi-Fi signal throughout their home.

WiFi ONE helps our customers by eliminating dead zones and buffering, giving them access to our superfast Internet speeds for multiple devices anywhere in their home. Meanwhile, our GigaONE rollout is nearing its completion for our legacy Cable ONE footprint.

At the end of the second quarter, 90% of our legacy homes passed had access to our 1-gigabit service via GigaONE. On the business services side, our expanded efforts to attract enterprise business customers are bearing fruit.

We were recently awarded two significant enterprise projects that we believe will positively impact results beginning in the fourth quarter of 2017. We are encouraged that business services will continue to be one of the drivers of our success.

We are pleased with the progress on integration of NewWave operations in what is now called our northeast division. You'll hear me use this interchangeably. In early fall, we will begin the work necessary to transition to 32-channel bonding, which will allow us to launch faster speeds, including GigaONE in the new NewWave northeast division footprint.

As expected, adjusted EBITDA margins for NewWave operations in the northeast division negatively impacted our results by 1.8 percentage points in the second quarter, but we anticipate that impact to lessen as the integration continues.

Our independent research on NewWave market has confirmed that we have opportunity to grow revenue and units and continue to increase customer satisfaction across both residential and business services.

We are looking forward to harnessing these prospects and appreciate the ongoing efforts of our associates to assimilate the various operational changes in order to make this happen. Now I will turn it over to Kevin for more details on our second quarter results..

Thanks, Julie. As Julie already mentioned, our second quarter yielded strong results for legacy Cable ONE, plus we had the addition of the NewWave operations.

Quarter-over-quarter comparisons have been even more complicated this quarter since we have legacy Cable ONE, with and without the change in accounting estimate related to capitalized labor cost plus two months of NewWave results in the quarter.

Please keep in mind, as Julie already mentioned, that the results of NewWave are not a full quarter, just two months. To assist with some of the comparisons, I'll provide reconciling items as we go through the discussion. First, let me share a few highlights from the second quarter.

As we mentioned, we completed the acquisition of NewWave on May 1, and we're pleased to report our combined results for the first time. Adjusted EBITDA was $113.3 million, an increase of 26.8% year-over-year, and an adjusted EBITDA margin of 47%.

The adjusted EBITDA results in the second quarter include two months of NewWave's operations and the favorable impact of a reduction in expense of $5.1 million due to a change in accounting estimate related to capitalized labor costs.

Without the contribution from NewWave operations, adjusted EBITDA would have been $102 million and adjusted EBITDA growth would have been 14.2% with a margin, as Julie just said, of close to 49% on legacy Cable ONE. Excluding both NewWave impact and the change in estimate related to capitalized labor, adjusted EBITDA growth would have been 8.4%.

Adjusted EBITDA less capital expenditures was approximately $73 million, an increase of nearly 41%. Excluding NewWave, adjusted EBITDA less capital expenditures would have been $66.6 million, an increase of almost 29%. Residential data revenues increased $17.1 million or approximately 20% year-over-year to $103.2 million.

Residential data revenues would have been $6.4 million or a 7.4% increase, excluding this $10.7 million contribution from NewWave operations.

Business service revenues increased $8.1 million or approximately 33% year-over-year to $32.5 million and business services revenues growth would have been $3.4 million or a 13.9% increase, excluding the $4.7 million contribution from NewWave operations.

Now getting into detailed results for the second quarter of '17 compared to the second quarter of 2016; revenues increased $36.5 million or 17.8% due primarily to the $32.2 million in revenues attributable to NewWave operations.

For the second quarter of 2017, residential data revenues comprised 42.8% of our total revenues and business service revenues comprised 13.5% of total revenues. So together, our growth businesses now comprise over 56% of our revenues.

Excluding the $32.2 million contribution from NewWave, revenues would have increased $4.3 million or 2.1% from the prior year quarter, with increases in residential data and business services more than offsetting decreases in residential video and residential voice.

Operating expenses were $83.9 million in the second quarter of 2017, an increase of $8.2 million or 10.8% comparable to the second quarter of 2016. Additional operating expenses attributable to NewWave operations were $15.9 million for the second quarter of 2017.

This was partially offset by a $3.9 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor costs, a $1.6 million decrease in programming costs resulting from fewer video subscribers and a decrease in backbone and Internet connectivity fees.

Excluding the impact of NewWave operations, operating expenses would have been $68 million in the second quarter, a decrease of $7.7 million or 10.2%. Selling, general and administrative expenses increased $7.7 million or 17.7% to $51.2 million.

Additional selling, general and administrative expenses attributable to NewWave operations were $5 million for the second quarter of 2017.

The remaining increase was due to higher acquisition-related expenses of $2.8 million and personnel costs of $1.3 million, and this was partially offset by a $1.2 million decrease in labor costs associated with the change in accounting estimates for capitalized labor costs.

Excluding the incremental expenses associated with NewWave operations, selling, general and administrative expenses would have increased $2.7 million or 6.2% to $46.2 million. This entire increase was primarily due to the acquisition-related expense of $2.8 million mentioned previously.

Interest expense increased $4.2 million or 56% due primarily to additional debt incurred during the second quarter of 2017 to finance the NewWave acquisition. Adjusted EBITDA was $113.3 million and $89.4 million for the second quarter of 2017 and 2016, respectively.

The adjusted EBITDA growth of 26.8% in the second quarter of 2017 includes the positive impact of NewWave acquisitions and the aforementioned capitalized labor costs. Without NewWave impact, adjusted EBITDA would have been $102 million and adjusted EBITDA growth would have been 14.2% for the second quarter of 2017.

Excluding both the NewWave impact and the change in estimate for capitalized labor, adjusted EBITDA would have been $96.9 million and adjusted EBITDA growth would have been 8.4%. For legacy Cable ONE, our margins have increased over 500 basis points from 43.7% to 48.8% in the past year.

As Julie mentioned previously, the inclusion of the NewWave results decreased our overall margins slightly to 47% due to the fact that NewWave is operating at a 35% margin.

As mentioned in our prior call, we expect that synergies achieved through integration will produce NewWave margins that will look similar to legacy Cable ONE's in the next several years. Capital expenditures totaled $40.5 million for the second quarter of 2017, representing approximately 16.8% of revenue.

Excluding the NewWave operations, capital expenditures would have been $35.5 million or approximately 17% of revenues. Estimating that our capital as a percentage of revenues will remain in the high teens through the remainder of 2017 as we assimilate NewWave into our operations.

Adjusted EBITDA less capital expenditures was $72.8 million as compared to $51.7 million in the prior year, an increase of almost 41%. Therefore, our conversion rate for the quarter, defined as adjusted EBITDA less capital expenditures as a percentage of adjusted EBITDA, has increased from 57.9% in 2016 to 64.3% in 2017.

From a liquidity standpoint, we remain in excellent position as we had approximately $90 million of cash on hand as of June 30. The company's debt balance was $1.2 billion, which included the $750 million of term loan borrowings in connection with the NewWave acquisition.

The company also had approximately $197 million available for borrowing under its revolving credit facility as of June 30. Overall, our debt to adjusted EBITDA was only 2.5x and our net debt adjusted for cash on hand to adjusted EBITDA is only about 2.3x, providing us with significant liquidity.

In conclusion, our solid financial performance continued in the second quarter, and we're very enthusiastic about our acquisition of NewWave. And with that, operator, we're now ready for questions..

[Operator Instructions] The first question comes from Frank Louthan of Raymond James..

So walk us through the margin story here.

How much do you -- how quick do you think you can retrace the margins with NewWave? And what operational levers can you pull to improve the margins? Or is a lot of that upside really just in the programming costs?.

Frank, this is Kevin. We've stated before, we don't give specific guidance. But obviously, the synergies that we mentioned when we did the deal were, there would be some corporate overhead allocations that would be more early on, and we've already recognized some of that, not a lot, but some of it.

There would also be some operating efficiencies that we believe we have where we're operating more efficiently than they do on an operating basis. And obviously, the third piece is programming. You mentioned that. We thought that the synergies would probably take two to three years to fully develop.

So we see the margin moving from, obviously, they're 35% up closer to ours over the next three years..

Great, all right. And then the standalone ads at Cable ONE were a little off-trend from what we're looking for.

Anything in your offers that was different in the quarter that would have caused that [indiscernible] seasonally weaker but expected a little bit different? Talk to us a little bit about what maybe you're doing from a marketing perspective or something that might have affected that..

This is Julie, Frank. Typically, the second quarter is typically our softest quarter. We did do a promotion -- a stronger promotion in the fourth quarter of 2016, which we probably did see some roll-off of. We also have some new personnel in marketing, so I would just point to -- let's see how the future goes..

Okay, great. Thank you very much..

The next question is from Craig Moffett of MoffettNathanson. Please go ahead..

This is actually Cathy [ph] for Craig.

To ask Frank's question maybe another way, excluding programming expenses, is there a way that you can disaggregate the incremental margin ramp potential in terms of the additional runway on incremental cost reductions both on your legacy and NewWave businesses? Maybe your mix shift away from video to broadband and potentially raising broadband price within NewWave's footprint to converge that further to Cable ONE since there's a big discrepancy right now? And then more generally, where do you think you can get to in terms of broadband and video prices within the next three to five years?.

Cathy, this is Kevin. I -- again, we haven't given any guidance on this. Obviously, you saw and rightfully so and we mentioned this when we bought the properties that their HSD penetration is at 26% versus our 31%, so we do believe there's upside there.

Obviously, their HSD ARPU is lower than ours also, and we do believe there's opportunities there also. We want to be always customer-friendly here and try to recognize we don't want to do anything radically to change, but we'll take a look at it over time.

Obviously, they have multiple tiers of HSD unlike us where our primary tier, as you know, is 100 megs for $55. They have multiple tiers ranging from 10 megs up to 100 megs. They do have good plant and good capacity. But we'll have to take a look at how we can maneuver over the next year or two to see how we can make them look more like us.

But I don't think we've given any guidance as to how long that will take or what that process will look like. We'll just have to be a little patient on that..

Okay, that's helpful. And then maybe a follow-up question on your CapEx trajectory.

Can you talk about the long-term capital intensity if you shift away from video? And then how does the transition to 32-channel bonding, as you mentioned in your prepared remarks, in the northeast division impact maybe a decline in CapEx otherwise?.

Well, I think as we mentioned again at closing of NewWave, they have excellent plant and excellent capacity, but there are some things we need to do, as Julie already mentioned. We'd like to get them to be 32-channel bonded just like us. We'd also like them to be all digital just like us.

So there will probably be a little upward pressure on capital, that's why I mentioned that you will probably see us trending up into the upper teens. Right at the moment, we're probably around 17% of revenues in terms of caps. But there'll be a little bit of work to be done to make them look like Cable ONE, but it'll take a little bit of time..

Okay, thank you so much..

[Operator Instructions] The next question comes from Stephan Bisson of Wells Fargo..

I was wondering, given how much capacity you have being so lowly levered, what the most recent priorities are for use of cash..

Well, I mean, Stephan, it's the same answer we've given before. I mean, we look at it at three different ways here. We have a capital allocation. We have bought back shares in the past. We will continue to look at that over time. We do have a dividend.

As Julie mentioned, we just increased that dividend and we'll continue to look at that on an ongoing basis. And then ultimately, as you saw with NewWave, we're looking for accretive acquisition opportunities and we'll continue to do that.

Agreed, our debt to cash flow is only at 2.3x, so we do have more than adequate capacity, but it will be a three-pronged approach taking a look at stock repurchases, dividends and potential acquisitions..

I guess just as a follow-up.

As you look at potential acquisitions outside of the traditional cable sector, is there anything that you may consider looking at perhaps in terms of more metro fiber or just anything more commercially based? Or is it strictly more just cable focused?.

We'll continue to look at various opportunities. Obviously, the cable industry, like NewWave, is something that we understand and it's easy to assimilate but as we've said before, if there are other opportunities that are cable related in the fiber arena, we would potentially look at that.

We just have to make a decision as to how it would benefit our business services going forward..

Great, thanks so much..

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Julia Laulis for any closing remarks..

Thank you, operator. We appreciate you joining us for today's call, and we look forward to speaking with you again next quarter..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..