More than ever before, Cable One is banking on broadband and business services to carry the day. But its all-important broadband engine is showing signs of slowing down, prompting some concerns on Wall Street.
Cable One Inc. , which will soon become the sixth-largest US MSO when its $735 million purchase of NewWave Communications closes, continues to add broadband subscribers and shed video customers with each passing day. But, while its video sub losses are finally moderating some, its broadband sub gains are also moderating as its monthly service rates go up. (See Cable One Bids $735M for NewWave and Is Cable One Beefing Up for Slaughter?)
In its fourth-quarter earnings release earlier this week, the Phoenix-based cable operator reported that it added a mere 2,400 residential high-speed data customers in the fall period. That addition nudged its total broadband base to nearly 470,000, up just 8,100, or 1.8%, for the year.
With a residential broadband penetration rate of only 30.8%, Cable One should still have plenty of room to grow that base. However, after a hefty price increase for data subscribers last year that largely boosted broadband revenues by nearly 13% on a year-over-year basis, such sub growth now appears harder to achieve. That dimmer sub growth prospect, along with the MSO's sagging video fortunes, is prompting concern among analysts, who worry about most of the company's revenue growth coming from higher prices.
"The company is continuing to struggle with slow unit growth," Craig Moffett, principal analyst at MoffettNathanson LLC , wrote in a note to investors. With smaller price increases likely in the future, he wonders, "Where will growth come from now?"
Cable One executives seem determined, though, to drive more broadband sub growth. As part of that push, they are rolling out gigabit services throughout their nearly 1.7-million-home footprint. On the company's earnings call, new Cable One CEO Julia Laulis said the MSO has now made its GigaONE service available to about 70% of its homes passed. In addition, she said, Cable One now offers a standard downstream speed of 100 Mbit/s in more than half of its markets.
"We pride ourselves on customer service and reliability," Laulis said, according to a transcript of the call supplied by Seeking Alpha. "And the independent research we conduct continues to illustrate high customer satisfaction with our residential HSD product."
Cable One officials are also counting on business services to stoke greater growth. In the fourth quarter, the MSO generated $26.6 million in commercial revenue, up more than 14% from the year-ago period. As a result, Cable One topped $100 million in business revenues for the year, up 13% from its 2015 total.
Company officials aim to build on that success this year by rolling out new programs for commercial customers. In early January, for instance, the MSO launched "Piranha Fiber," a 1 Gig service for businesses. On the earnings call, Laulis described it as a "ferociously fast Internet" service "delivered over reliable fiber-related architecture and shared bandwidth, which combines the most favorable attributes of coax and fiber networks." She said Cable One aims to introduce this "mid-market" product in "several new markets each year for the foreseeable future."
In stark contrast to its continued broadband and commercial services gains, Cable One continues to bleed subscribers and revenues on the once-core residential video end of the business. The MSO shed another 9,000 video customers in the fall quarter, bringing its loss to more than 43,000, or more than 12% of its video customer base, for the entire year. It now has about 307,000 video customers, far fewer than its broadband total.
As a result, Cable One reported $72.1 million in video revenues for 2016, down 7.5% from nearly $80 million in 2015. Plus, more than half of its customers now don't take video, and its video penetration rate is a paltry 19.2%, easily the lowest among major US cable operators.
But, as they have before, Cable One executives shrugged off the video losses as no big deal because of their low, possibly non-existent, profit margins on video services. With their focus tightly on broadband and business services, they indicated that they will simply pass on video rate increases to customers as their programming costs rise and let the chips fall where they may. "We will not have our other products subsidizing video," Laulis stated.
Overall, Cable One reported total revenues of $819.6 million for the year, up 1.5% from $807.3 million in 2015. Net income for the year rose to $98.9 million, up 11.1% from $89 in the previous year, as the company raked in more revenue from video and broadband rate increases.
— Alan Breznick, Cable/Video Practice Leader, >Light Reading