Good morning, welcome to the Cable One second quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. 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. At this time, I would like to turn the conference over to Kevin Coyle, Chief Financial Officer. Please go ahead, sir.
Thank you, Denise. Good morning, welcome to Cable One's second quarter 2018 earnings call. We're excited to have you with us this morning as we review our results. Before we proceed, I would 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 press release or in our recent SEC filings. Cable One is under no obligation, in fact, expressly disclaims any obligation to update 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, Julia Laulis. With that, let me turn the call over to Julie.
Thank you, Kevin. Good morning. Thank you all for joining us on our second quarter 2018 earnings call. I will review a few highlights then hand it over to Kevin for a full recap of our financial performance. Before getting into our results, though, I want to congratulate and thank our associates. Earlier this summer, Cable One received the Cablefax 2018 MSO of the Year Award. This Award is a direct result of the hard work, dedication, and commitment of our associates. I couldn't be prouder to lead this distinguished team. Our positive second quarter results also flow from our outstanding team of associates. Some highlights include year-over-year increases in legacy Cable One total revenues of more than 5% and in adjusted EBITDA of 6.2%.
These results reflect the successful execution of the long-term strategy we've discussed on previous calls, a strategy which we believe is serving both Cable One customers and our shareholders well. We were pleased to announce our second dividend increase earlier this week, up 14% to a $2 per share quarterly dividend, or from $7 to $8 per share on an annualized basis. Also related to capital allocation, you may have noticed that we made significant share repurchases during the quarter, which Kevin will address later in the call. Now, turning to our operations, let's review how HSD unit growth stacked up for the quarter. We saw 2.5% combined residential and business HSD unit growth for legacy Cable One. Meanwhile, legacy Cable One experienced its strongest quarterly residential HSD unit growth on a year-over-year basis that we've seen since June of 2017.
In the second quarter, we began testing market-based pricing and new packaging options, with early results showing higher sell-in rates to faster tiers, as well as decreased churn, especially from customers in competitive markets. We will continue to measure the results of these tests to ensure long-term benefits for customers and the company alike. Regarding pricing, residential HSD ARPU was up slightly more than 9% in legacy Cable One year-over-year. For NewWave, or what we now call our Northeast division, ARPU is beginning to climb and look more like legacy Cable One figures. Total company residential HSD ARPU growth has been fueled by a proportional mix of marketing, such as lack of discounts and improved sell-in and upgrades, our modem rental rate adjustment earlier this year, and increased usage-based subscription to premium tiers.
Related to our Northeast division, in the second quarter, we promoted Ken Johnson, one of the senior leaders of NewWave, who came over as a division vice president following the acquisition, to the role of SVP of Technology Services. Additionally, our teams completed the integration of finance and accounting processes, as well as all operational activities related to our network operations center and dispatch. Our billing system conversion in the Northeast division is also well underway, with expected completion later this year. The migration of Northeast division customers to legacy Cable One's more robust billing system will provide a more consistent customer-centric experience while allowing us to gain operational efficiencies. Work continues to prepare the Northeast division markets for all digital conversion and the launch of gigabit speeds to residential customers next year, allowing us to eliminate the digital divide in these communities.
On the business front, our SMB group launched a second generation of our managed Wi-Fi service, which offers expanded coverage and customer self-management capabilities. This upgraded service covers up to 10,000 sq ft when deployed with the latest Wi-Fi technology installed by Cable One Business. Additionally, business customers who subscribe to this service are able to manage their own Wi-Fi settings through ONE Gateway, our mobile app. We're already seeing delighted business customers subscribing at a brisk pace. The second quarter also saw the deployment of hosted voice service across nearly 40% of our markets, offering business customers the freedom and flexibility of the latest cloud-based virtual PBX technology. While the original project timeline slated our completion for year-end, we now expect to have 100% rollout by the end of the third quarter.
Our strategy of building EPON to greenfield areas has been very successful as well, with Piranha Fiber now available to business customers in six markets. As a reminder, Piranha Fiber is an extremely reliable fiber-based architecture, shared bandwidth service with an HSD ARPU that is typically double that of our cable modem-based business product. Our most recent launch encompassed the downtown corridor of Boise, with early results exceeding expectations. We've accelerated our scheduled rollout of this business product with triple the number of originally planned launches for 2018. In keeping with the goal of making our lives of our customers easier by offering value-added services, we'll be launching a new residential and business portal next quarter that will give both customer segments an engaging and seamless self-service experience, allowing them to interact with us online for a variety of services.
Before I hand the call back over to Kevin, I want to take a moment to recognize him. Many of you may be aware, this spring, Kevin announced his intention to retire in early 2019. He will still be with us until January, serving in an advisory role and working closely with Stephen Cochran, this will likely be Kevin's final earnings call. Stephen, who joined us on August 6th, will take the CFO reins on August 13th. Over the past three years, Kevin's financial discipline, business acumen, and strategic expertise has helped Cable One evolve into a leading broadband communications provider. He has been a key contributor to the development and execution of the company's strategic plans and has laid a strong financial foundation for Cable One to continue its focus on driving growth that is profitable and sustainable.
Thank you, Kevin, for serving us so well in our early public company years. Kevin will provide more financial details on our second quarter results.
Thank you so much, Julie. I appreciate that. Before getting into the details, I want to remind everyone that our 2018 second quarter results include three months of NewWave operations, while our 2017 second quarter results include only two months, as NewWave acquisition was completed on May 1, 2017. Getting into our 2018 second quarter results. The operating results for the second quarter of 2018 demonstrate a continuation of the robust financial performance achieved during the first quarter. Consolidated revenues for the second quarter of 2018 were $268.4 million, including a $49 million contribution from NewWave operations, compared to $241 million in the prior year quarter. Consolidated residential data revenues increased 18.3%, and business service revenues increased 18.4% year-over-year.
Legacy Cable One had strong revenue growth of $10.6 million or 5.1% compared to the second quarter of 2017, with year-over-year increases in residential data and business service revenues of 11.1% and 11.3% respectively. Net income in the second quarter was $43.8 million, compared to $27.9 million in the prior year quarter, an increase of 57.2%. Excluding net NewWave, net income would have been $40.5 million, a 57.1% increase. The increase in net income was driven primarily by lower income taxes with our second quarter effective tax rate decreasing to 22.6% from 38.6% in the second quarter of 2017 as a result of federal tax reform legislation enacted at the end of 2017, of course, our strong revenue increase. Net income per share increased from $4.85 to $7.65, an increase of 58%.
Consolidated operating expenses were $91.8 million or 34.2% of revenues in the second quarter, compared to $84 million or 34.9% of revenues in the prior year quarter. Excluding NewWave, operating expenses were flat at $68.1 million in the current quarter compared to $68 million in the prior year quarter. Consolidated selling, general, and administrative expenses were $54.2 million and $51 million for the second quarter of 2018 and 2017, respectively. Legacy Cable One selling, general, and administrative expenses increased $3.3 million year-over-year, primarily attributable to higher insurance costs of $2 million and marketing costs of $1.4 million. They were offset by lower acquisition-related costs of $3.2 million. Adjusted EBITDA was $127.1 million for the second quarter of 2018, an increase 12.2% from $113.3 million in the prior year same quarter.
Without NewWave operations, adjusted EBITDA would've been $108.4 million, a 6.2% growth from the second quarter of 2017. Our margin for legacy Cable One also increased 60 basis points from 48.8% in the prior year quarter to 49.4%. We are also very pleased with the performance of NewWave as their adjusted EBITDA has grown from $16 million in the fourth quarter of 2016 to approximately $18.8 million for this quarter, an increase of 17.2%. Capital expenditures total $49.8 million and $40.5 million for the second quarter of 2018 and 2017. The $49.8 million of capital expenditures represents 18.6% of revenue. Adjusted EBITDA less capital expenditures for the second quarter of 2018 was $77.3 million, an increase of $four and a half million or 6.1% from the prior year quarter. Excluding NewWave, capital expenditures would've been $42.6 million.
Spending for capital expenditures was higher during the second quarter due to timing, as we had relatively light capital spending during the first quarter. We still continue to expect that our capital expenditures as a percentage of revenues will be in the high teens for 2018. From a liquidity standpoint, we remain in excellent position as we had approximately $204 million of cash on hand as of June 30th versus $162 million at December 31st, 2017. During the quarter, as Julie mentioned earlier, we repurchased 30,717 shares of our common stock for $20.3 million at an average price of approximately $660 per share. We continue to generate significant free cash flow, which is further enhanced by the 2017 federal tax reform legislation with an expected cash tax savings of approximately $38 million to $42 million during 2018.
At quarter end, our debt balance was approximately $1.2 billion, which included approximately $739 million of Term Loan borrowings to finance the NewWave acquisition. In April 2018, we repriced our Term Loan B at a half a percent lower interest rate, which in turn will save us approximately two and a half million in interest costs annually. Overall, our debt to adjusted EBITDA was 2.3 times, and after netting cash on hand against debt was only 1.9 times, providing us with significant liquidity. We also had approximately $197 million available for borrowing under our revolving credit facility as of quarter end. We are very pleased with our second quarter financial results. Overall, we continue to drive top-line growth in our primary focus product lines of residential data and business services. We also continue to experience steady and strong adjusted EBITDA growth and margin expansion.
Acquired NewWave operations continue to outperform our expectations. As we continue to integrate NewWave operations into our Cable One model, we anticipate further growth in adjusted EBITDA and as ARPUs improve and efficiencies are realized. This all goes to demonstrate that our core strategy is working and successful. In addition, beginning in the third quarter, our financial results will fully reflect our acquired NewWave operations for both 2017 and 2018 for the first time. Operator, we're now ready for questions.
Thank you, sir. 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 your question has been addressed, you may withdraw from the queue by pressing star then two. Our first question this morning will be from Philip Cusick of J.P. Morgan. Please go ahead.
Hey, guys. A couple, please. Can you talk about the consumer response to the new pricing in broadband, Julie, where are upselling the base at this point?
I caught your first part but not your second, Phil. I don't want to get too far ahead on the pricing and packaging. I think by the time we talk next quarter, we'll have very holistic results versus top line.
Interesting to note that when we reduce prices on faster tiers, ARPU actually goes up because selling goes up, and our already low churn is going lower. Those are the top-line previews that have us pretty excited, but look forward to a more fulsome discussion next quarter.
To be clear, when you reduce prices on faster tiers as in still a premium to your standard 55.
Correct
Faster than the 100 where you're selling today.
That's correct. Customers are making a call on value. If you think about our 100 Meg service at $55 on a price per Meg, that's $0.55. If you look at, in those tests, the next highest tier 200 Meg at $65, that's $0.32 price per Meg. Customers are voting, and it's exciting to see.
Okay. You'll be able to tell us next quarter about sort of what the customer responses look like?
That is my guess. Yes.
Okay. Business growth decelerated a bit this quarter. Are you confident that this can continue to grow at double digits?
I am. Yeah, I am. It's likely seasonal and I feel very confident. Actually, just had an exchange with our VP of business services this morning about our strength relative to our competitors.
Okay. Can you expand a little bit on what programs or products are driving that strength?
Sure. We went through some of them today. Piranha Fiber is something that serves us very well. If you think about business services, we are the disruptor in that space. Piranha Fiber is something that serves that competitive marketplace very well. Rolling out hosted voice and improving our WiFi service, which is everything to customers these days, are also products and value-added services that are helping business services to grow. We continue to make inroads into the enterprise space as well.
Good. Thanks very much.
You bet.
Thanks.
The next question will be from Zach Silver of B. Riley FBR. Please go ahead.
Okay, great. Thanks for taking the question. I just wanted to drill down a little deeper into the net adds on the residential data side. Then for Legacy, you guys were able to grow despite pulling back some promotions and also the increased modem fee. Are you seeing any uptick in churn? Maybe is that being more than made up for by gross adds? Then on the NewWave side, how are those customers receiving kind of the new pricing as you kind of bring NewWave's prices up to the Legacy price?
Hi, Zach, it's Julie. Net adds of HSD and Cable One, you asked about churn, and churn is not going up in Legacy Cable One. It's going down. It seems that people that are choosing us are, again, making a value call, and they like what they're getting. It is actually amazing. In NewWave, I don't think we can make a judgment call on the new pricing there because we have put so many changes into effect in those systems. We've shortened collection cycles. We've stopped giveaways. We've stopped discounts. At the same time, we've increased the speeds, which customers appreciate and introduced new pricing. We're making so many changes in those areas. I think we have to wait and see as they normalize.
Okay, great. If I could just ask a quick follow-up. We share your thesis that you guys can be a natural kind of aggregator of rural cable systems.
Expanding on this, I wanted to see if you could provide what you're kind of seeing in the M&A landscape relative to maybe a more kind of chilled environment for M&A in the first half.
Zach, I don't think we can really comment on specifics. As we've said in the past, we view that we're the natural aggregator of cable systems in rural America, that continues. We will be aggressive. As we've said in the past, we continue to look at all potential opportunities that are out there. We know everyone in the market, from venture capital-backed properties to family-owned properties. We will continue to be aggressive. We think we can do it better than anyone out there, and that there will be synergies, as you pointed out in your research earlier this year, on any acquisition we make. We're very bullish on acquisitions, and we look at all of them and any of them, but I can't really comment on any one in specific.
Okay. That's fair enough. Thank you guys very much for taking the questions.
The next question will be from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you very much. Any promotions or any other things that would've helped the residential video subs in the quarter? Just curious on that. A little bit better trend than we thought. On the new customer portal, are there any development costs for that that might go away as you roll that out from developing it? Thanks.
Good questions, Frank. This is Julie. On the promotions point, we actually have been What I would call trying to establish a value of our standard product, that's our 100 Meg product at $55 for several months now. What that means is we have not been doing discounting. In the quarter, we did tip in a promotion, and we plan to do that on an ongoing basis, but these are short-term promotions versus promotions ad nauseam on end, tipped into normal everyday pricing. There was some of that. In terms of development costs for our portal, that is being done in-house with Cable One associates.
Great. Thank you very much.
The next question will be from Brandon Nispel of KeyBanc Capital Markets. Please go ahead.
Thanks for taking the questions. On NewWave, what needs to happen, Julie, to get EBITDA margins up to legacy Cable One? I guess maybe, can you give us a sense on timing around when you think you can get margins higher? Maybe on the new packaging and pricing, when do you think we might get back to the 2% type of broadband subscriber growth rate, as a result of some of these changes? Thanks.
Take it first.
If you want, sure.
Brandon, I will take the first one. On the margins for NewWave, we obviously have done a lot already. When we acquired NewWave, the margins were at 34%. They are already north of 38%. Obviously, our margins are at 49%, so there is still a disparity, but we are probably only in inning 4, if you are looking at a baseball game. This fall, we will be combining our billing systems. That will be a synergy you will see. There is still some programming synergies to come. There is still a lot of ongoing things. We are very happy, as I said earlier, that cash flow has gone from an annualized basis from $64 million already up to $75 and there is still synergies to come, but it takes a little bit of time. We told the market when we did the deal it was going to take two and a half to three years.
Again, we are probably in inning 4 of the game.
You already addressed the timing issue. We originally stated three years as our horizon, although we said last quarter and this quarter as well, that things are going very well with the NewWave integration and that it is performing ahead of expectations. Your question on growth rate, is that also aimed at NewWave specifically or new Cable One?
I guess legacy Cable One, as you roll up the pro forma, when do you guys think you can get back to that sort of 2% type of range? I guess are some of the promotions centered around getting back to that type of growth rate?
For legacy Cable One, we are essentially there. We've stated in the past, and continue to maintain, that we think a steady growth rate in the 2%-3% range is what we can accomplish. We're not going to do promos simply to drive growth. We have a strategy, so we're going to stay with our strategy because it's serving us well, but I don't see us having an issue with hanging in the 2% range. I don't want to say easily, but easily.
Thanks, Julie.
The next question will be from Craig Moffett of MoffettNathanson. Please go ahead.
Hi. Thank you. Julie, I guess it's staying with the same theme of a number of the previous questions, but particularly back when Tom was CEO, he would comment that the upside for penetration in your footprint for broadband was probably a bit lower because of demographics. I'm wondering if you still have that view, given the technology advantages you've got, and what you've seen competitively from the deployments of upgrading DSL and whether you're looking at some 5G fixed wireless broadband deployments that you'll be competing against. If you could just talk about kind of how you see the longer-term penetration upside for broadband across your footprint, both old and new.
Old and new, legacy and NewWave?
That's right.
Okay. Upside to penetration, we believe, is determined and measured by how the product is delivered, i.e., the type of competition that's in a marketplace. Given that our markets are relatively competition-free at this point, and I say relatively and at this point, highlighting those two pieces. There are marketplaces that we do very well in in terms of penetration, but not all markets are created equally. Penetration varies by market, by region, depending on the competitor in the marketplace. I don't expect that penetration in markets in Mississippi or rural Oklahoma are going to match New York City exactly. I think we have room on the penetration side, and we are going to aim to get there with a balanced mix of rate and volume. We are testing those pieces right now.
Thank you.
Ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Kevin Coyle for his closing remarks.
Thank you, operator. I just want to thank Julie and the entire Cable One team for all their support over the past three and a half years. I've really enjoyed my time at Cable One since we took the company public in mid-2015, and I look forward to working with Steven Cochran, our incoming CFO, to ensure a seamless transition. With that, let me turn the call back over to Julie for just some final words.
Thank you, Kevin. We are sincerely grateful for all that you've done since joining the Cable One family. As I mentioned, we welcome Steven as our new CFO next week, and he'll also be heading up our investor relations function. We invite you to reach out to schedule meet and greet calls. Steven and I will also be attending the Deutsche Bank Annual Leveraged Finance Conference in October in Scottsdale, Arizona. We hope to see many of you there. We appreciate you joining us for today's call, and we look forward to speaking to you again next quarter.
Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.