Cable One is sizing up a new growth strategy that could see the company plow some fiber assets into a new joint venture seeking to accelerate network deployments in rural areas.

As detailed in this recent 8-K filing first spotted by Multichannel News, Cable One is pursuing a potential joint venture transaction in which it would contribute fiber assets in certain markets served by Delta Communications/Clearwave and Hargray, alongside cash contributions from yet-to-be-identified third-party investors. Cable One acquired the equity interest of Hargray that it did not already own back in February 2021, and acquired Clearwave Communications in 2018.

The operations associated with the assets of Clearwave and Hargray that would be contributed by Cable One to the JV are expected to represent about 3% of the company's consolidated revenues for the three months ended June 30, 2021.

The JV "is intended to accelerate deployment of fiber Internet to residents and businesses in the relevant markets, as well as to provide connectivity to unserved and underserved areas in such markets," Cable One explained in the filing.

Nothing's set in stone, as the terms of the JV are subject to negotiation and none of the potential parties have entered into any definitive agreements to consummate such a deal, the company said.

Word of a JV-in-the-works follows a third quarter in which Cable One spent $21.8 million on network expansion, its highest total ever in the category.

"While these internal efforts will continue, we've identified a potential joint venture transaction that we expect will both accelerate the growth trajectory of these new market buildouts," Julie Laulis, Cable One's president and CEO, said last Thursday (November 4) on the company's Q3 earnings call.

She expanded a bit on what's behind the idea. Cable One, Laulis said, aims to receive a majority equity interest in the proposed JV in exchange for contributing Clearwave minus its tower business and certain assets of Hargray Fiber. Partners, meanwhile, would make a "significant cash investment to fund the accelerated growth," she added.

"This venture would allow us to have a proven and dedicated team that can be hyper-focused on accelerating market expansion in new and existing systems," Laulis added. "This will also allow Cable One's team to remain focused on our primary business, increasing penetration rates, integrating recently acquired companies and driving higher margins and greater free cash flow."

If it all goes to plan, Michael Gottdenker, former chairman and CEO of Hargray, will serve as executive chair, and David Armistead, former SVP at Hargray, will serve as CEO of the proposed standalone company.

Cable One CFO Steven Cochran noted that the structure will enable the group to operate as a standalone company, but suggested it's possible that the JV could later be brought back into Cable One "when it's a matured business."

Video penetration drops to 10.5%

Cable One's laser focus on broadband and a de-emphasis on pay-TV continued into the third quarter of 2021.

Cable One's video penetration rate declined to 10.5%, down 1.2% from the year-ago quarter. The company lost another 7,000 video subs in the quarter, which was actually better than the -11,000 expected by analysts.

Meanwhile, data penetration climbed 2.1%, to 38.8%.

Cable One believes its data-centric strategy is "sustainable, as a result of both the organic and inorganic growth opportunities that lie ahead," Laulis said. She noted that more than 70% of Cable One's revenues come from higher-margin and predictable residential high-speed data and business services, insulating the company from the "risks and underlying trends in the low-margin video marketplace."

She also touted Cable One's competitive position, noting that just 25% of its competitors provide broadband service with download speeds of 100 Mbit/s or higher.

Cable One added nearly 13,000 residential broadband subs on a sequential basis, with residential high-speed Internet ARPU (average revenue per user) growing by 5.1%, thanks to speed upgrades and sell-ins of higher-speed tiers. Laulis said penetration of 1-Gig broadband services reached 14% in the quarter.

Craig Moffett, analyst with MoffettNathanson, noted that Cable One's broadband penetration rate is still the lowest among its peers while its ARPU is the highest. But he says there are other aspects to the company's story to keep an eye on.

"While Cable One's lower broadband penetration portends a longer runway for unit growth, their higher broadband ARPU suggests less upside potential than peers, particularly given significantly lower per capita income and high poverty levels in their footprint," Moffett wrote.

The rate of Cable One's ARPU growth is slowing. While that could portend slower overall revenue growth, Moffett views this as a positive trend because it could speak to greater sustainability.

Cable One's high ARPU "relative to peers is potentially misleading; relative to peers, their mix of standalone broadband, without bundled discounts, is much higher due to their lower penetration of video," Moffett explained. "And they also benefit from up-tiering and, although perhaps to a lesser extent, from usage-based pricing charges."

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— Jeff Baumgartner, Senior Editor, Light Reading