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Cable One (CABO) Q4 Earnings Miss Estimates, Revenues Up Y/Y

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Cable One, Inc. (CABO - Free Report) reported fourth-quarter 2018 earnings of $7.34 per share, which missed the Zacks Consensus Estimate of $8.04. The figure also came way below the year-ago figure of $25.09 per share. Notably, fourth-quarter 2017 earnings were higher than expected due to significant benefits from the Federal tax reform.

Total revenues of $269.9 million missed the Zacks Consensus Estimate of $270.7 million. However, the figure increased 4.7% year over year owing to revenue growth in residential data and business services, partially offset by decline in revenues from residential video and voice.

Quarter Details

Cable One residential data revenues (46.8% of its total revenues) increased 12.3% year over year to $126.4 million. However, residential video (30.6%) and voice (3.7%) revenues decreased 4.7% and 11.2% year over year to $82.6 million and $9.9 million, respectively.

In fourth-quarter 2018, residential data and video average revenue per user (ARPU) increased 9.4% and 7% year over year to $69.9 and $88.2, respectively. Notably, the growth in residential data ARPU was due to users’ shift toward premium tiers, marketing initiatives undertaken to attract users and rate adjustments made in modem rent in first-quarter 2018.

Residential voice ARPU declined 2.1% year over year to $32.97.

Business services revenues (14.9%) increased 10.3% year over year to $40.2 million. Business services ARPU also increased 2.1% year over year to $186.7 in the reported quarter. Notably, homes passed — number of residential and business customers serviced under Cable One’s footprint — declined 2.4% year over year to 2,093,501 as of Dec 31, 2018.

Advertising sales revenues increased 1.7% year over year to $7.5 million. However, other revenues decreased 7.9% year over year to $3.3 million.

As of Dec 31, 2018, total residential customers increased 0.4% year over year to 734,250. Additionally, business customers increased 6.1% year over year to 70,615 in the same period. Total customers also increased 0.9% from the year-ago period to 804,865. Moreover, total non-video customers (59.4% of total customers) grew 10% year over year to 478,442 as of Dec 31, 2018.

Total primary service units (PSUs) declined 2.3% year over year to 1,115,431 in the same period. Additionally, video and voice PSUs decreased 10.3% and 6.6% year over year to 326,423 and 125, 934, respectively. However, data PSUs increased 3.1% year over year to 663,074 as of Dec 31, 2018.

Yet, total residential PSUs declined 3% year over year to 1,010,261 as of Dec 31, 2018. Additionally, video and voice PSUs decreased 10.5% and 9.9% year over year to 310,475 and 99,070, respectively. However, data PSUs increased 2.7% year over year to 600,716 as of the same date.

Total business services PSUs also increased 4.8% year over year to 105,170 as of Dec 31, 2018. Additionally, data and voice PSUs increased 7% and 8% year over year to 62,358 and 26,864, respectively. However, video PSUs declined 7.1% year over year to 15,948 in the same period.

Data penetration increased 1.7% year over year to 31.7% as of Dec 31, 2018. However, video and voice penetration decreased 1.4% and 0.3% year over year to 15.6% and 6%, respectively.

Operating Details

In the reported quarter, adjusted EBITDA increased 8.8% year over year to $127.6 million owing to revenue growth in residential data and business services. Adjusted EBITDA margin expanded 180 basis points (bps) year over year to 47.3%.

Selling, general and administrative expenses increased 4.4% year over year to $57.6 million owing to an increase in expenses related to bonus and acquisition. Total operating expenses, excluding amortization and depreciation, remained almost flat year over year at $91.8 million.

Operating income increased 16.7% year over year to $69.3 million. Operating margin expanded 260 bps year over year to 25.7%.

Balance Sheet

Cable One exited the quarter with cash and cash equivalents of $264.1 million compared with $236.9 million as of Sep 30, 2018.

Cash flow from operations declined 4.3% year over year to $100.2 million. Total capital expenditures in the reported quarter were $58.6 million compared with $50.5 million in the year-ago period.

Recent Updates

Cable One completed the previously announced acquisition of Clearwave Communications this January. Clearwave Communications, which is a “facilities-based service provider”, owns and operates high-capacity fiber network offering services to business and enterprise customers.

The acquisition is expected to help Cable One deliver enhanced services to business service customers as it will have an access to Clearwave’s high-capacity fiber network. Additionally, management expects to widen its fiber footprint and increase customers in the business segment.

From Jan 2, 2019, Cable One introduced new residential data pricing and packaging across its entire footprint and the majority of NewWave footprint. Markedly, the company is offering lower pricing and higher speeds throughout its premium tiers.

Notably, Cable One’s flagship product continues to offer 100 Megabits per second (Mbps) download speeds, with a 300 Gigabit per second (Gbps) data plan at $55. Its $65 plan offers 200 Mbps speed and 600 Gbps data plan. The company introduced a new plan at $80, which provides 300 Mbps speed and 900 Gbps data plan.

The changes made to the plans are intended to reduce churn and provide more flexible packages to customers. Additionally, the reduction in price variance between the tiers resulted in increased ARPUs at higher tiers, per management.

On Dec 11, 2018, the company announced that it will rebrand itself as Sparklight starting this summer for expanding Cable One footprint and in 2020 for NewWave footprint expansion. This change is likely to reflect the company’s services and offerings.

2019 Guidance

Cable One expects to realize synergies from NewWave acquisition, which was carried out in May 2017. The synergies from the same are expected to aid adjusted EBITDA margins of the company.

Management expects that it will incur expenses in the range of $9-$11 million over the next two years related to its re-branding strategy.

Zacks Rank & Other Stocks to Consider

Currently, Cable One carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader consumer discretionary sector include Strategic Education Inc. (STRA - Free Report) , PlayAGS, Inc. (AGS - Free Report) and TEGNA Inc. (TGNA - Free Report) . While Strategic Education and PlayAGS sport a Zacks Rank #1 (Strong Buy), TEGNA carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Strategic Education, PlayAGS and TEGNA is projected to be 13%, 12% and 10%, respectively.

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