Cable One 'Happy' to See Broadband Subs Go With OTT-TV

Jeff Baumgartner
News Analysis
Jeff Baumgartner, Senior Editor, Light Reading
2/28/2019



Cable One no longer invests in its pay-TV service as it continues deemphasizing video, focusing instead on broadband and business services. Indeed, it has no qualms when broadband subscribers select an alternative OTT-TV service -- a strategy that aligns with the plan the MSO began about five years ago.

"They just have a lot more [video] choices these days," Julie Laulis, Cable One's president and CEO, said Wednesday on the company's Q4 earnings call. "That might be our linear video product. It might be an OTT product, and we're happy to have them go to Hulu or Netflix or Sling TV... And we also reinforce with them that they need a reliable high-speed, robust Internet service like we provide."

That thinking fits with Cable One's shift about five years ago to a data-focused model. "We've seen nothing to derail us from that path," Laulis said.

She acknowledged that Cable One isn't putting much time and effort into its lower-margin pay-TV service, though it maintains those services for the video customers that remain.

"That being said, we're not trying to drive our video customers away," Laulis said, adding that Cable One will instead help educate customers on the expanding number of video choices they have available.

While Cable One's blasť attitude about video might not be the appropriate strategy for every US cable operator, it has worked out well for Cable One, which, notably, employs usage-based data policies for residential broadband.


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"Cable One is a post-video cable business," Craig Moffett, analyst with MoffettNathanson, said in a research note issued Wednesday. "That means that video subscriber metrics donít matter much (even if we, and everyone else, will continue to track them, if only to illustrate that an operator can prosper without video)."

Though its video sub base has been hammered and even its broadband sub growth has lagged some of its peers, Cable One has strong cash flow and enjoys higher margins despite bringing in less revenue ($269.9 million in Q4, in-line with Wall Street expectations).

"By the simplest measure, Cable One's stock has been the best performing of all its peers since going public in 2017," Moffett explained, adding Cable One currently enjoys the industry's highest broadband ARPU.

"Today's results fit the recent patterns... Subscriber losses, yes. And slow revenue growth, but really good margins," wrote Moffett, who is still debating whether the company warrants its relatively high valuation among MSOs. "[We] still struggle to make the case that Cable One is the most attractive among its peers...," he continued. "If one embraces the notion that their valuation is appropriate, then one must also concede that other cable companies are radically undervalued."

In Q4, Cable One lost 2,100 video subs, improving over year-ago losses, and an indication that those declines are "moderating," Moffett said.

Cable One added 2,300 broadband subs, a 3.3% year-on-year increase, which was slower than its peers, but aided by lofty broadband ARPU of $69.90, up 9.4%. That's not only an industry best, but the industry's fastest growing, the analyst noted. Business services grew 10.3%, in-line with the growth rate of Cable One's MSO peers. High-speed data and business services now comprise 62% of Cable One's total revenue.

"Whatever the metrics, it is clear that, for Cable One, broadband is by far the most important part of the story," wrote Moffett, who rates the stock as "Neutral" with a target price of $875. Cable One shares were down $18.65 (1.93%) to $945.96 in Thursday morning trading.

Speed upgrades, usage-based billing aid margins
The broadband ARPU grew due to a mix of marketing, a modem rental rate adjustments that took hold last year, subs' move to higher-end speed tiers, as well as Cable One's usage-based data policy, said Laulis.

With respect to those data usage policies, Cable One charges $10 for a bucket of 100 gigabytes of data when customers exceed their data plans -- 300GB for its flagship 100 Mbit/s tier ($55 per month), 600GB for its 200 Mbit/s offering ($65 per month); and 900GB for its 300 Mbit/s service ($80 per month). Cable One recently introduced a $40 unlimited data plan and reduced the price variance between its speed tiers.

Though critics hold usage-based billing policies are there to help MSOs keep OTT video competition in check and do nothing to relieve network congestion, Cable One counters its policies have improved customer satisfaction and reduced churn, and allow customers to self-select the appropriate package.

"While it's still early, we're encouraged by the results so far," Laulis said of Cable One's new unlimited data option. Average data usage for Cable One customers is about 260GB to 270GB, and appears to be growing in the range of 23% to 30% annually, she added.

Cable One also has begun marketing an introductory tier of 15 Mbit/s and 100 GB of data for $30 to reach under-penetrated parts of the market. So far, that offering has not cannibalized Cable One's flagship 100 Mbit/s tier, Laulis said. said.

Bigger picture, Cable One is moving ahead to rebrand the company as "Sparklight." That's in the planning and execution phase, with a transition expected to occur mid-summer through the second half of 2019 for Cable One's legacy footprint, and into 2020 in the acquired NewWave Communications systems, Laulis said. (See Cable One Bids $735M for NewWave.)

Cable One might be on the prowl for more M&A, particularly in rural markets. "We'll look for opportunities for strategic fits," Cable One SVP and CFO Steven Cochran said.

Cable One ended 2018 with $264.1 million of cash and cash equivalents, $195.9 million available for borrowing under its credit facility, and a debt balance of about $1.2 billion.

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— Jeff Baumgartner, Senior Editor, Light Reading

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