How long can Cable One get away with raising monthly service rates, cutting costs and shrinking its video business to boost its bottom line?

That's the big question Wall Street is asking after Cable One Inc. reported solid revenue, income and profit margin gains in the second quarter on Tuesday. Now the sixth-largest US MSO with more than 800,000 customers in 21 states after closing its $735 million acquisition of NewWave Communications in May, Cable One ran up the numbers again despite shedding more video subscribers and losing both broadband and voice customers in the traditionally weak spring quarter. (See Cable One Bids $735M for NewWave and Is Cable One Beefing Up for Slaughter?)

Unlike nearly every other major cable operator, Cable One's avowed strategy is to downsize its video business because of high programming and equipment costs and low financial returns. For the past few years, it has been aggressively raising its pay-TV rates for customers while discarding several major video networks and generally cutting down on its programming offers. As a result, the Phoenix-based cableco now has just 285,000 video customers in its legacy cable systems, down from about 325,000 a year ago and much more than that previously, and its video penetration rate has sunk to lower than 18% of homes passed, an industry low. (See Cable One Doubles Down on Broadband .)

In turn, Cable One has become probably the first major MSO to reap less than 50% of its total revenues from video services. In the second quarter, the MSO reported that video now generates only 42.4% of overall revenues in its legacy cable systems, down from 45.9% a year ago. And, for the first time, residential data now accounts for a slightly higher share of overall legacy revenues than video, clocking in at 44.2%.

Yet, despite this systematic erosion of its video customer base, Cable One continues to enjoy a healthy bottom line. Even though it lost another 9,200 video customers in its legacy systems during the spring, and its video revenues fell 4.3% on a year-over-year basis, its average revenue per video user (ARPU) climbed 9.5% to $80.47. So, even though it has fewer video customers, the MSO is compensating by making substantially more money from each customer.

"Cable One has always argued that video carries far more cost than just programming," wrote Craig Moffett, principal analyst at MoffettNathanson LLC , in a note to investors this week. "They are proving themselves correct; the many input costs that support video (e.g., customer service and set-top box-related repair and maintenance) are all falling,"

Similarly, Cable One boosted ARPU for its residential broadband business in its legacy systems during the second quarter by 5.2% to $64.70 despite shedding 2,600 data subs. So, even though its broadband growth is slowing down on an annual basis, it is more than making up for that slowdown by squeezing more money out of each customer.

Thanks to such moves, Cable One keeps boosting its already high profit margins. In the spring quarter, the MSO boasted profit margins of 46.4% in its legacy systems as its overall costs fell while total revenues rose nearly 20% to $103.2 million and net income climbed 7.3% to $28.6 million.

"Cable One's margins are now within shouting distance of 50%, the magic number touted by Altice as the Holy Grail of cable cost management," Moffett noted. "We've written in the past about Cable One's over-reliance on pricing to achieve any top-line growth at all. But the bottom line is performing better."

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The big question, as laid out earlier, is how long can CableOne keep this up? As Moffett points out in his report, the cableco is losing customers overall. In its legacy systems, the number of residential customers fell by 1.4% on a year-over-year basis to just under 602,000. "Perhaps the most important metric is total customer relationships," Moffett noted.

Shrugging off such concerns, Cable One executives are now busily integrating NewWave properties into the fold as their new "Northeast division." Plans call for tweaking the acquired company's operations and business model to "make NewWave look like Cable One," according to CFO Kevin Coyle. Most notably, Cable One intends to introduce 32-channel bonding to all the former NewWave systems so they can offer gigabit speeds, as well as upgrade them all to all-digital video transmission.

In other plans, Cable One intends to extend the reach of GigaOne, its 1 Gig service, to the rest of its legacy footprint. It now passes about 90% of its legacy households with the service. The MSO also aims to keep rolling out its new home WiFi service, WiFi One, which it introduced in May, and expand further in the business services market.

— Alan Breznick, Cable/Video Practice Leader, Light Reading