Good day, and welcome to the Cable One Q1 2019 fiscal earnings report. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steven Cochran, Senior Vice President and CFO. Please go ahead.
Thank you, Sean. Good afternoon, and welcome to Cable One's first quarter 2019 earnings call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion may contain forward-looking statements relating to future events and expectations. You can find factors that could cause Cable One's actual results to differ materially from these projections listed in today's earnings release and in our recent SEC filings. Cable One is under no obligation and expressly disclaims any obligation, except as required by law, to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, today's remarks will include a discussion of certain financial measures that are not presented in conformity with U.S. generally accepted accounting principles.
Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be found in our earnings release or on our website at ir.cableone.net. Joining me on today's call is our President and CEO, Julie Laulis. With that, let me turn the call over to Julie.
Thank you, Steven. Good afternoon, and thank you for joining us for our first quarter 2019 earnings call. 2019 has already been exciting for Cable One. We started off in early January closing the acquisition of Clearwave Communications, and on April 1st announced the acquisition of the data video voice business and certain related assets of Fidelity Communications, all while yet again delivering impressive operational performance. Our strong results were highlighted by a net gain of nearly 11,000 residential HSD PSUs on a sequential basis, which represented growth of 1.8%. Year-over-year, residential HSD PSUs grew 3.3%. Our strategic decision to launch pricing and packaging at the start of the year clearly paid dividends as we saw robust connects and improved retention.
As discussed on our February call, our decision to not implement an HSD-related adjustment, combined with a one-month delay video rate adjustment, muted our overall revenue and Adjusted EBITDA growth compared to the first quarter of 2018. Despite those factors, we still saw total revenue growth of 4.8%, including residential HSD growth of 8.3% and business services growth of 25.1%, or 8.9% when excluding the impact from Clearwave. During the quarter, our percentage of revenue from residential HSD and business services climbed to 63.5%. We delivered strong Adjusted EBITDA of $133.1 million, an increase of 8% year-over-year. Our Adjusted EBITDA margin was 47.8% for the quarter, which was a 140 basis point improvement over the first quarter of 2018. As a long-term veteran of this industry, I have grown to appreciate how important a good first quarter is to meeting annual expectations.
With solid customer growth, continued increases in ARPU, and effective management of our costs, we are well positioned to deliver on our 2019 goals. As you've heard before, we closed the Clearwave acquisition on January 8th, and our first quarter 2019 results include Clearwave operations as of that date. Clearwave continues to operate well, and we are learning more from these new associates about their processes and how we can help accelerate their growth plans. Additionally, we announced the acquisition of Fidelity last month. We are very excited about this opportunity to acquire a well-managed, culturally aligned, and geographically similar operation. We believe this transaction will be immediately accretive following closing. We expect to realize $15 million in estimated annual run rate cost synergies within three years of closing the transaction. The acquisition is also expected to provide estimated tax benefits of approximately $87 million on a present value basis.
Fidelity's business model closely mirrors Cable One's, which should allow for a more seamless transition. In fact, one of the things we like most about Fidelity is that their people, their markets, and their performance look a lot like ours. We are beginning to plan the Fidelity integration, and our folks have made multiple trips to meet with the new associates who will be joining us so that we can gain insight into their best practices and accelerate the assimilation together following the anticipated fourth quarter close. The Fidelity integration timeline also aligns nicely with the completion of the NewWave Communications integration, with final NewWave Communications synergies expected to be realized throughout 2019, contributing to our Adjusted EBITDA growth and margin expansion into the future.
As I mentioned earlier, we are very happy with the positive impact it had on our customer satisfaction and growth. We are also equally pleased to see a continued positive impact on revenue growth per unit as our residential HSD ARPU moved to $70.80, a 5.5% increase year-over-year without any contribution from a service or modem rental related rate adjustment. During the first quarter, we saw roughly 50% of our new customers choose our 200 megabits or higher speed service, and nearly 10% of our new customers opted to purchase our unlimited data plan. We will continue to monitor new sales and existing customer migration, but we like the results to date. Turning to business services, our numbers this quarter were positively impacted by the inclusion of Clearwave.
The Clearwave acquisition added nearly 2,400 customers, contributed approximately $6.1 million in revenue, helped pushing year-over-year business services revenues up by more than 25%, and helped increase business services ARPU, which expanded to $213.04 for the quarter. Meanwhile, our legacy business services continued its steady growth. We continue to make investments to increase operational efficiencies as well as provide an improved business customer experience. Over the next two years, we will be enhancing our billing system with a number of business services improvements, including changes that will allow us to provide superior support to our growing E-Rate and enterprise products. Additionally, our business team will be transitioning to an updated version of our CRM product, which will lay the groundwork for automated order entry between it and our upgraded billing platform.
Another highlight for the business services and technology teams was the attainment of Metro Ethernet Forum, or MEF, 3.0 certification for one and 10 gigabit per second E-Line, E-LAN, and E-Access services. We are the first MSO in the country to receive this certification. We are now working to roll that standard out across key pieces of the network. We believe this will help drive sales in our carrier business, in addition to the government, education, and medical verticals. Our work on rebranding to Sparklight continues. We announced the rebrand to our customers in legacy Cable One markets last month. We will begin our Sparklight transition campaign at the end of this month. This summer will see us begin to transition signage, trucks, uniforms, and billing. We are energized by this evolution to our new brand and are looking forward to the next chapter in our story.
As I said at the top, Cable One accomplished quite a lot during the first quarter. I appreciate all that our associates do to move our business forward. We are all excited about our plans for the rest of 2019. Now Steven will provide more financial details on our first quarter results.
Thank you, Julie. The first quarter of 2019 produced strong financial results, representing a continuation of the financial performance achieved in 2018. Revenues for the first quarter of 2019 were $278.6 million, compared to $265.8 million in the prior year quarter, representing a 4.8% increase. As Julie mentioned, this increase was fueled by a residential HSD revenue increase of 8.3% and a business services revenue increase of 25.1%. Excluding Clearwave operations, total revenue increased 2.5% year-over-year. Net income in the first quarter was $38.7 million. Net income per share on a fully diluted basis was $6.78 per share. Operating expenses were $94.5 million, or 33.9% of revenues in the first quarter, compared to $94.7 million, or 35.6% of revenues in the prior year quarter, a 170 basis point improvement.
Selling general and administrative expenses were $61.4 million, or 22.1% of revenues, and $50.9 million, or 19.2% of revenues for the first quarter of 2019 and 2018, respectively. The increase in SG&A was primarily attributed to the acquisition-related costs incurred during the quarter, an increase in marketing expenses, and additional costs related to Clearwave operations. Adjusted EBITDA was $133.1 million for the first quarter of 2019, an increase of 8% from $123.3 million in the prior year quarter. Our Adjusted EBITDA margin increased 140 basis points year-over-year, going from 46.4% to 47.8%. Capital expenditures totaled $46.6 million and $41 million for the first quarter of 2019 and 2018, respectively. Included in the current quarter were $2 million of capital expenditures related to Clearwave operations.
In the first quarter of 2019, we repurchased 5,984 shares for $5.1 million at an average cost of $847.70 per share and paid $11.4 million in dividends to shareholders. In January 2019, we borrowed $250 million of term loans to help finance the Clearwave acquisition. We also entered into $1.2 billion in notional amount interest rate swap agreements during the quarter, including a $350 million forward-starting interest rate swap beginning in June 2020, for the purpose of hedging against the impact of potential future interest rate increases on our variable rate debt. Under the two swap agreements, we make payments at a weighted average fixed base rate of 2.68% over the next 10 years and receive payment from two financial institution counterparties at a floating interest rate based on LIBOR.
From a liquidity standpoint, we remain in excellent position, as we had approximately $188 million of cash on hand as of March 31st. We continue to generate significant free cash flow, and at quarter end, our debt balance was approximately $1.4 billion, which included approximately $976 million of term loan borrowings and $450 million of bonds. Overall, our debt to Adjusted EBITDA after netting cash on hand against debt was 2.3 times, providing us with ample liquidity. We also had approximately $169 million available for borrowing under revolving credit facility as of quarter end.
Subsequent to March 31st, we established a new $325 million delayed draw Term Loan B maturing in 2026. We just announced that yesterday we refinanced our existing Term Loan A with a new $250 million Term Loan A, established a new $450 million delayed draw Term Loan A, and expanded the capacity of our revolving credit facility to $350 million. These loans mature in 2024. Proceeds from these transactions, together with cash on hand, are intended to be used to redeem our existing $450 million of senior unsecured notes in the second quarter when the call premium steps down to finance the Fidelity acquisition, which is expected to close in the fourth quarter, and for other general corporate purposes. One other item to note.
In connection with the migration of NewWave Communications's billing system to Cable One's existing platform, residential video PSUs experienced a non-operational increase of approximately 5,700 and 7,200 during the fourth quarter of 2018 and the first quarter of 2019, respectively. Due to differences in tracking methodologies of residential bulk multi-dwelling units between the two billing systems. Excluding these adjustments, our residential video PSU loss during the last 12 months would have been 12 and a half %. We are pleased with our first quarter financial results. In particular, our growth of residential HSD and business services. Our core strategy continues to deliver steady Adjusted EBITDA growth and margin expansion. A healthy balance sheet has allowed us to strategically acquire businesses that will contribute to the continuation of that growth. Our recent financing activity further strengthens our financial position going forward. Sean, we're now ready for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Stephan Bisson with Wolfe Research. Please go ahead.
Good afternoon. Just a couple questions for me. First, the 7,200 positive impact on the video subs from the NewWave Communications billing system conversion, was there any impact on data or voice subs?
There was not. It's just an accounting mechanism of bulk units, where they were counting them as one, and we counted them based on the number of, say, an apartment that's got 200 units as a bulk, we would have counted them as one or they would count them as one, we count them as 200.
Okay. On Clearwave, the $6.1 million of revenue, is that a reasonable run rate? Could you give us any type of color on the EBITDA contribution in the quarter?
Yeah. I think it's reasonable to the extent that it wasn't a full month. We closed on January 9th. If you pro rate that essentially, that's a good starting point for where we're headed as that business continues to grow.
Any color on the EBITDA contribution? I think the margin should be higher than the overall.
Yeah, I think that's the only real guidance we've given on that is that it's a higher margin than our existing business. Yeah.
Lastly, just on a couple of the other expenses. I think you had said $10 million of rebranding expense to be done evenly throughout the year. You were a little lower than that in Q1, should the rest be ratable over the remaining three quarters? System conversion expenses, when should we think about those beginning to trail off?
First, Stephan, it's Julie. On the rebranding expenses, we said we'd spend between $9 million and $11 million over a two-year period, that would be inclusive of Legacy Cable One and NewWave Communications rebranding. Rebranding expenses will pick up as we go through the rest of this year, with the bulk occurring in 2019. When you're talking about system conversion expenses, were you talking about the business services?
No, there's two items that's backed out of Adjusted EBITDA. That is a combination of the rollover effect of the end of the billing conversion, essentially, which I think was about a half million of the total, and the rest is related to the ERP conversion. The ERP conversion, which is our financial system, we're in the process of going through that conversion, which will occur throughout most of 2019 and into early 2020.
Great. Thanks so much.
Sure.
Our next question comes from Craig Moffett with MoffettNathanson. Please go ahead.
Yeah. Hi, Julie. I wonder if you could just talk about the broadband growth rate acceleration you've had, particularly from about a year ago. For a long time, there was a recognition that the demographics of your footprint, and the rural nature of your footprint might be holding back growth. It certainly doesn't seem to be showing up as much anymore. I wonder if you can just talk about what are the things that you think have made the biggest impact, and whether you now think you can really close the gap in terms of penetration relative to some of your larger peers.
You bet, Craig. I think that we've already started to do that is close the gap, as we are growing our penetration. As there are in most things, there are a lot of things that will contribute to this. It's not just one thing. We had been doing marketing for a long period of time, all aimed at our 100 meg service, which we still do, but we've also added a lot more customer choice with our new pricing and packaging. I would say quite honestly that our old marketing had grown stale. It was the same message over and over again, and it was very price-oriented and discounted-oriented, so it was about the offer. Our marketing and advertising now has much more depth, and it really goes to the value.
It started with us stopping the sale of our products and establishing the value, because again, 100 megs for $55 is a really great value. Then add to that all the testing, and it was very detailed testing with a lot of business intelligence running behind the scenes to say, what are the right levers for us to pull in terms of growth and from a unit basis and from an ARPU basis. Based on our results with the full launch across all the properties, legacy and NewWave Communications, in the first quarter, I'd say that we are hitting the right mark. We are driving very sustainable growth. People are electing what package to go into. They're incredibly satisfied. We know that from quantitative results with research and through things like social media.
I think a piece of that, too, is as we got ready to transition to Sparklight, we really went back to our roots and said, look, this is about connecting with our community. Again, if you look at our advertising, it is very localized. You see our markets in those ads, and they usually have a PR component where we give back to the community, and it's really resonating with the non-customers. Does that answer your question?
It does. I'm assuming that with the Sparklight change, that you'll be introducing all new marketing and new messaging along with the branding?
Right. Just the amount of marketing pressure as well is going to help.
Got it. Okay. Thank you.
The only thing I might add to that, too, is I think just given usage continues to go up and the importance of whether it's over-the-top or others that they use, the DSL we compete against in a number of our markets just isn't nearly as relevant. As more people make that switch from DSL to our services, that value is even greater in the packages we offer.
Can you disclose what that level of service is? I think most of your larger peers have talked about 230-250 GB per month. Is yours in a similar range?
It is. Our average usage at the end of the quarter was 290 GB. We're experiencing between 30%-35% growth in data usage. A couple other stats related to pricing and packaging is that our sell-in above that 100 Mbps standard level is about 50%. 50% of the new customers that are coming on board are taking above that 100 Mbps level of service. As I mentioned, about 10% are taking the unlimited data plan, and that's an additional $40 a month. The new flexible pricing and packaging, which launched in January, has a higher average starting rate and is bringing us better growth as well. Just as an aside, our churn is at new historical low levels. In the past, I said our churn was low and going lower. We just hit a new record for low.
Thank you.
Our next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead.
Hi, guys. This is Maddison Schrage on for Brandon. I was wondering if you guys could talk about the overlap that you had with Fidelity and what the competitive positioning looks like for Fidelity today. Just to follow up, could you talk about the integration costs you expect to incur from Fidelity this year? Thanks.
Sure. Maddie, it's Julie. Fidelity, if you think about a donut, they're sort of the hole in the middle of us. They're in Missouri, Illinois, a bit in Texas, Louisiana, and Oklahoma. They are just like an all-around Cable One market. Their competitive footprint is smaller than either legacy Cable One or NewWave Communications. Integration cost this year, I would say none.
Pretty minimal.
Yeah.
Do you know what you would expect for integration cost next year, then?
No.
On capital? Are you talking operating or capital or both?
Both.
Yeah, I think we'll probably talk more about that as we get closer to closing from the standpoint of, similar to NewWave Communications, what our capital integration costs will be. I don't think we expect a lot on the operational integration side.
Thank you.
Bye.
Our next question comes from Philip Cusick with J.P. Morgan. Please go ahead
Hey guys, a couple of follow-ups, maybe. I think, Julie, you mentioned that video was the best since 2013, but excluding the one-time step-ups from the apartment changes, it looks like it was worse year-over-year. Did I miss that?
Yeah, I don't think that's what she said. We didn't say video was the best. We talked about churn being the best, and I think the highest HSD connects, or highest HSD growth since the spin.
Not surprisingly, I didn't say anything about video.
Yeah, exactly.
No, I wouldn't have thought so I had it wrong. Can you help us understand?
It is the worst. It was greater this year than it was the year before on the video loss side.
Perfect.
Yes.
Can you help us understand the impact of Clearwave on the commercial ads and EBITDA? If I assume revenue of $6.1 million at a 70% margin, that's about $4.2 million in EBITDA, can I then assume there are some cost-cutting synergies on top of that? Is that reasonable?
Yeah, there will be some. Clearly, we never did this transaction for synergies, but there will be some synergies, from the standpoint of even just being part of a larger company and scale and things you get. There are some synergies in there. There were also some tax benefits in there, at least as we think about that. More than anything, this deal is about growth and this deal is about learning and, as much as anything, the ability to efficiently deploy capital because we don't have better investments that we can make throughout the organization from an internal standpoint than the investments we make there. As a company that's generating a lot of free cash flow, our ability to have a source to make more investments and to drive even stronger growth is a huge part of what this is about.
Okay. Maybe it's already out there, but can you remind me how many business broadband subscribers came over with Clearwave?
It was 2,400 subscribers.
2,400.
Yeah. Which I think is about the right number for broadband, too.
Thank you. Also, I believe, Julie, you introduced some more flexible promotions in some markets. Can you talk about what the impact of that has been, and if much of your improved subscriber momentum come from those markets, or has it really been across the board? Thank you.
Yeah. What we've done is more market-based pricing. Pricing isn't standardized across all markets. It's mostly standardized, but there are a few outlying markets that get different offers. I would say that our growth has come from across the board. The markets that get more flexible promotions tend to be the heavily competitive ones. I would not say the growth is coming from there. It's stabilized, but the growth is coming from the other markets.
Thank you.
Our next question comes from Zachary Silver with B. Riley FBR. Please go ahead.
Okay, great. Thanks for taking the question. One of your peers recently announced a service which I think essentially acts as a low latency service for gamers, and it remains to be seen whether that's marketing or something that's useful. Given some of these new activities where low latency may be something that you could potentially upsell customers on, do you see this as an area that you could go into? Maybe is there anything in the works to do this?
Zach, it's Julie. Low latency is certainly something that the team here discusses. We do see it as sort of the next frontier now that speed has certainly been won by operators like ourselves and others. There's nothing that I can discuss about any sort of new service related to that at this time, though.
Okay. Just to follow up, do you think that low latency is something that can be monetized like speed has been?
I think there's a possibility, yes.
Got it. Then, one for either Julie or Steven. You've done two very different acquisitions, one in Clearwave and one in Fidelity. I guess given what you've seen with both of them, if there were no capacity constraints and you had every deal available to you, which of these two do you think is more interesting at this point?
I think it's interesting that we're close to Mother's Day, and Zach is asking us to pick which child we like best.
Yeah. What every mother would say is both, right?
That's right. I feel like both for different reasons.
Yeah. No, I think every deal you do has its uniquenesses to it, both of these I think we felt very fortunate to have these two come together at the same time to fill two different needs that we had and two different uses of capital for us. More than anything, both coming with great teams and great people and great opportunities.
They each have opportunities.
Yeah. Just really, really good fits, we're excited to be able to buy businesses that are growing, that fit us culturally, and being able to do it with relatively inexpensive debt is a great opportunity to create a lot of value going forward.
Got it. That's helpful. Then I guess one more on Fidelity. I'll try this a different way, but with NewWave Communications, there was some incremental CapEx there. Do you see Fidelity's network as needing as much incremental CapEx as NewWave Communications did, or is there less sort of upgrades to be done there?
Well, Fidelity is a family-owned business, in that respect, they look somewhat different than NewWave Communications did as PE-backed. There's one thing.
The next is, in large measure, we would like the networks to be standardized. We want Fidelity to look like us or us to look like Fidelity because we'll decide which has the better mousetrap.
Got it.
Yeah. Safe to say, when we put a model in place, we make assumptions that we're going to invest in capital, then we do the work to decide exactly what that will ultimately be. We feel very comfortable that if similar capital is required, that it's still very accretive.
That makes sense. All right. Thank you guys.
This concludes our question and answer session. I would like to turn the conference back over to Julie Laulis for any closing remarks.
Thank you, Sean. I want to thank all of our Cable One associates for a solid start to 2019. We appreciate everyone joining us for today's call, and we look forward to speaking to you next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.