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Cable One Racks Up Record Margins Again

Alan Breznick
11/8/2019

Cable One continues to dazzle investors by using its laser focus on broadband and its de-emphasis of traditional pay-TV service to ratchet up its average revenue per unit (ARPU) and profit margins even as it continues to bulk up by buying small cable operators.

In its third-quarter earnings release late Thursday, Cable One, now the fifth- or sixth-largest US MSO, once again reported record broadband ARPU and margin numbers as it continues to rake in more highly profitable broadband and business services subscribers and shed far less profitable video customers. In particular, it reported accelerated residential broadband subscriber growth as it continues to boost its broadband penetration rate from relatively low levels.

Digging into the details, Cable One netted 7,400 new data subscribers in Q3, below Wall Street's consensus expectation of 8,900 subs but higher than the 6,900 subs it added a year earlier. Residential broadband services accounted for most of that increase, with the cableco adding 6,400 consumer data subs. That gain lifted the MSO's total residential broadband sub count to 619,000, up 3.5% from 598,000 a year ago.

Thanks to these subscriber gains, rate increases and speed tier upgrades, the Phoenix-based operator raked in $134.3 million in residential data revenue for the summer period, up 8.2% from $124.1 million a year earlier. Residential broadband now accounts for 47.1%, or nearly half, of the operator's total revenue of $285 million.

Residential broadband ARPU clocked in at $72.09, up 4.7% from a year ago, as Cable One continues to lead the industry in that key metric. But, as Moffett Nathanson principal analyst Craig Moffett pointed out in a research note to investors on Thursday, the company's ARPU growth rate is no longer running much higher than that of its cable peers.

The good news for Cable One is that, unlike some of its cable peers, it still has plenty of runway left for broadband growth because of its relatively low broadband penetration rate. It also faces less competition in its largely rural and exurban 2.1-million-home footprint compared to most other large US MSOs.

"Cable One still has one of the industry's lowest broadband penetration of homes passed at just 32.2% and, with limited fiber-based competition, their ceiling is arguably one of the highest in the industry," Moffett wrote. "They are at last growing the broadband business at a rate fast enough to drive meaningfully higher penetration."

In the business services arena, Cable One reported $50.7 million in revenue, up 28% from $39.6 million a year earlier, putting it on an annual run rate of $200 million. Business services now accounts for an impressive 17.8% of the company's overall revenues, up from 14.7% the year before.

Pay-TV losses better than expected
Meanwhile, Cable One continued to shed video customers at a steady, if somewhat moderating, clip. The operator lost 10,400 pay-TV subs in the third quarter, actually fewer than Wall Street expected and slightly fewer than it lost in the comparative quarter last year. As a result, it ended September with just 283,000 pay-TV customers, less than 50% of its broadband sub total.

But any video sub losses are still quite OK by Cable One because the company is more profitable without them. "As we've written extensively, the more video subscribers they lose, the higher their margins go," Moffett wrote. "And margins are the most important part of the story, not just for Cable One but in fact for the whole industry. And it is here that their results really shined."

Eyes out for more M&A opportunities
Fresh off the consummation of its $526 million acquisition of Fidelity Communications last month, Cable One is starting to set its sights on its next M&A target, even as it starts carrying out its three-year plan to integrate the former Fidelity systems into its expanded fold and bring them up to its financial and operating standards. On the earnings call yesterday, Cable One executives said they will now begin evaluating more opportunities to bulk up further.

"I think we'll have increased capacity to do more" acquisitions, said Cable One CFO Steven Cochran. "We feel like it's an important part of what we do."

In the wake of the bullish earnings report, Cable One's share price was trading at $1,395.41 in morning trading Friday on the New York Stock Exchange, up 3.67% for the day.

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

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