Good evening, and welcome to the Cable One CABO Earnings Report Q3 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Mr. Steven Cochran. Please go ahead.

Thank you, Amanda. Good afternoon, and welcome to Cable One's third quarter 2020 earnings call. We appreciate you joining us today. 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 earnings release and in our recent SEC filings. All forward-looking statements are made as of the date of this call. 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, Julia Laulis. With that, let me turn the call over to Julie.

Thank you, Steven. Good afternoon to everyone joining us on our third quarter earnings call. It has been quite busy at Cable One since we last spoke to you. Like everyone else in Q3, we continue to deal with the effects of COVID-19 pandemic on our associates and business. Moreover, some of our systems in the southeast were impacted by one of the most active hurricane seasons in recent history. Notwithstanding those challenges, we completed our previously announced acquisition of Valu-Net and minority interest in Wisper. We also announced that that we will be entering into a partnership with Mega Broadband Investments, or MBI for short. Following the end of the quarter, we closed our minority investment in Hargray Communications through the contribution of our Anniston, Alabama system and we extended and upsized our credit facilities and priced $650 million of new 4% senior unsecured notes due 2030 that will provide us more financial flexibility going forward. Steven will get into more details on MBI and the debt transactions later in the call. While we've had 8 hurricanes and tropical storms hit our Texas, Louisiana and Mississippi systems in quick succession, we were very fortunate that our associates and their families remain safe. Our thoughts are with all of those who have been affected by and those who are still recovering from these storms. I want to take a moment to thank our associates who worked diligently throughout this hurricane season to prepare for the potential impacts and who took care of our customers and restored service as quickly as possible following the event. I also want to thank our customers for their patience while we made the repairs necessary to get their services back up and running swiftly. To support recovery efforts for residents of the impacted communities, Cable…

Thanks, Julie. The third quarter of 2020 produced strong financial results. Revenues for the third quarter were $339 million compared to $285 million in the prior year quarter, representing an 18.9% increase. This increase was fueled by a residential HSD revenue increase of 29.9% and a business service revenue increase of 17.3%. Excluding Fidelity and Valu-Net operations, which I'll refer to as the acquired operations, total revenue increased 5.9% year-over-year; residential HSD revenue increased 16.9%; and business services revenue increased 5.7%. Operating expenses were $107.3 million or 31.7% of revenues in the third quarter compared to $94.9 million or 33.3% of revenues in the prior year quarter, a 160 basis point improvement. Selling, general and administrative expenses were $62.6 million or 18.5% of revenues in the third quarter compared to $58.9 million or 20.7% of revenues in the prior year quarter; a 220 basis point improvement. This includes a partial reversal of the enlarged bad debt reserve we established in Q2 as collections of receivables were better than originally estimated in the current environment. Net income in the third quarter was $66.3 million. Net income per share on a fully diluted basis was $10.96 per share. Adjusted EBITDA was $174.4 million for the third quarter and increased 24.6% from the prior year quarter. Our adjusted EBITDA margin increased 230 basis points year-over-year, going from 49.1% to 51.4%. Capital expenditures totaled $74.6 million for the third quarter of 2020, which equates to 42.8% of adjusted EBITDA. During the quarter, we invested nearly $14 million of CapEx into network expansion and integration activities, bringing our year-to-date total to over $32 million. In the third quarter of 2020, we paid $15.1 million in dividends to shareholders or $2.50 per share. From a liquidity standpoint, we had approximately $625 million of cash and cash…

Thank you. [Operator Instructions] Your first question comes from Phil Cusick from JPMorgan. Please go head. Pardon me, Phil, are you on mute? Please rejoin the queue. Your first question comes from Greg Williams from Cowen. Please go ahead.

Great, thanks. Steve, a question for you and some good color on Mega Broadband. But can you provide what they were posting an annualized EBITDA. I was coming up with the number around $112 million. Just wondering if I'm in the ballpark. And on the Mega Broadband deal structure, given the sort of bifurcated structure, it seems that it allows you some dry powder for additional M&A along the way before the 2023 call rights. Is that a fair characterization? Will you continue to execute deals? And what does the M&A landscape look like? And then another question just on fiber to the home. There's been a lot of buzz around fiber to the home specifically in rural areas, whether it's greenfield or telco brownfield, fixer uppers. You and AT&T noted a more aggressive tone in fiber. And are you seeing heightened pressure in your territory? Thanks.

Yes. So on MBI, we disclosed what we disclosed and are comfortable given as they're a private company, private equity owned. Clearly, you can kind of do the math on what logical EBITDA margins. I think the piece I would say is they're growing very quickly because they are – they brought a set of assets that had been probably under-invested in and under managed, and they've been executing a plan for a couple of years now. And so they're in that extreme growth stage. And so growing very nicely and I think very complementary to what we do, both from a geography standpoint as well as a type of operation standpoint. And yes, I think, clearly, part of our strategy to date has been strengthen our balance sheet, go find an acquisition, come from a position of strength and then finance it later. And so we were able to do that. And with the good markets in October, we're able to take advantage of kind of reloading our balance sheet. So we feel like we've got plenty of capacity to continue to be active. As far as the M&A landscape, I think that's – there's a lot going on out there right now. There's been a lot of deals have been done. I think we feel very fortunate to have been able to find transactions outside of processes, being creative with ownership groups who like what Cable One brings to the table. And we hope to continue to both leverage the relationships as well as leveraging Cable One and the culture that we have to be able to go and be an attractive alternative for people who are looking to either sell their company or find an investor to partner with in. Julie, do you?

Yes, sure. As it relates to fiber to the home, I think, first, it bears remembering that we also have fiber either in the ground or on the poles. We've been building everything with fiber for years now, anything on greenfield. And as far as pressure, I would say no, we have less than 10%, probably hanging around 8% of our total footprint that has fiber to the home available to them. So it is just not something that we've seen to date.

Great, thank you.

Thank you. Your next question comes from Zach Silver from B. Riley. Please go ahead.

Okay, great. Thanks for taking the question. First one for me is just similarly related on the other side of that with AT&T stopping their sales of DSL. Just wondering if you can – what's your sense of how big of an opportunity that is? And at the same time you have T-Mo, I think, rolling out pretty ambitious plans for their home Internet fixed was offering. How big of a competitive threat do you see that? And what markets are you expecting to see that in?

As far as the AT&T, as soon as we saw that was happening, we went and took a look. And the opportunity is about 80,000 homes is the footprint of overlap there. And our marketing people are on top of taking advantage of that situation. As it relates to T-Mobile, or any competitor, quite honestly, we are constantly scanning our local folks and making sure that we're on top of anything that's going on in our markets, whether it's builds or marketing or hiring. We like to think that we have a competitive mindset in that our reliable products and our above-average service will serve us well. So we'll watch T-Mobile and see what happens. Right now, the speeds that they're talking about is not something that's worrying us, but we would never count them out.

Great. Okay. And then the second one is just if the FCC does change to become democratic controlled FCC. Can you give us some puts and takes about how you see the regulatory environment evolving for you guys over the next couple of years?

I can't even tell who won the election yet, but we're going to crystal ball of that.

Fair enough.

So, if – it's an if because we still don't know the outcome. But if the FCC goes democratic, I would assume that they will work on bringing net neutrality back, which, overall, if you think about it, isn't a huge concern in that we have never throttled or prioritized traffic. We wouldn't do that. We don't do that. It's not good for our customers, therefore, it wouldn't good for us. Therefore, the only thing hanging out there would be the specter of possible rate regulation. And I mean, the way it's looking right now is, if, in fact, the Senate stays Republican majority, even with a Democrat in the White House – I'm not the final authority on this, but my guess is that doesn't happen.

Got it. That makes sense. I think just one more if I could. Just on – you nibbled some CBRS licenses. Can you talk about the rationale for those licensed acquisitions?

Sure, the CBRS license was really for Wisper, our fixed wireless investment. There's some pretty specific rules around change of control. And once you file an application, the ability to have a change of control, and we were looking out between CBRS and RDOF and other things, realizing we had no real-time we could close the transaction because of various applications, and so we, ended up just being the entity that acquired them and then basically sell them to Wisper. So that's all that was really related to.

Got it. All right. Thanks, Steven. Thanks, Julia.

Thank you. [Operator Instructions] Your next question comes from [indiscernible] from Raymond James. Please go ahead.

Hi guys. This is Rob on for Frank here. So going forward, as it pertains to CBRS, is there any additional color you guys are willing to provide with respect to your plans for the CBRS spectrum? And then following up on that, could you give us an update on the lower end product? I think it was like $15 a month plan, if that's still going? And if so, if we could get an update on how that's been performing relative to your other plans? Thank you.

Sure. So the CBRS is – it's more Wisper used as part of the fixed wireless technology, so that there's licensed spectrum there compared to most Wisps who are operating primarily on unlicensed spectrum so it just gives them more control and certainty of the business. And nothing specifically as it relates to Cable One for the CBRS auction. And on the low-end plan, I think we have sub-500 customers on it. So there definitely – it was there to meet a need. I don't know that we ever had more than 1,000 at any one point in time. Many came in, many of them upgraded services. And a good plan to have in place, but nothing that has been a remotely material part of our ads.

The bigger trend, and it was happening before COVID, but it accelerated, like so many other things during COVID, is people buying into plans above the 100 meg. So our 200 meg plan is now our flagship. That is to say a more people have that plan than any other plan. And selling above the 100 meg level is 70%. So people are taking much faster speeds, not lower at this point in time.

Great. Thank you.

Thank you. Our next question comes from Evan Young from KBCM. Please go ahead. Pardon me Evan, are you on mute? Evan your line is live.

Hello.

Hello.

Evan.

We can hear you.

Great. Sorry about that. It's Brandon, not Evan. Let's see. Julie, a question for you. Subscriber growth, obviously, it's been really strong. People are working from home, people are purchasing Internet. But one would have thought that in 2020, a lot of people would have already purchased Internet. So I'm curious in your thoughts and just in terms of where these subscribers are coming from. And is it helpful to share the stats on selling above 100 megs. Can you share your sell in on unlimited data? And then for, Steven, obviously, you've made a ton of investments in the last couple of months. How do you plan on helping investors understand the performance of some of these investments, given that a lot of them are going to be just minority interest? And then secondly, can you help us thinking think about how you're thinking about leverage on a pro forma basis as if you were considered the full owner of those assets? Thanks.

I'll jump on in. So yes, we've been – it's been interesting to see who's come in the door during COVID, why they came in the door. Because we have done research with them, their retention rates and their data usage rates. It's been a fascinating group to watch. I think we believe there would always come a time when people would need a more robust, reliable internet service in our markets. We did not know it would be pandemic-related. We kind of thought it would be a product that was driving it. But the folks that came in the door came from all walks of life. They were – they could have been previous fiber customers, DSL customers or cell-only customers, i.e. no broadband in the home ever. And they came to us for speed and reliability. We are also seeing anecdotally now, although our competitive researcher is also seeing moves into our area, and you probably read about folks moving to more rural areas and we're seeing a bit of an uptick there as well. So they came to us for speed reliability and some of them are moving. They are – when they came in the door, they had a credit profile that looked very similar to our existing subscriber base. In terms of demographics, they were younger and they tended to have less children in the home. They are retaining, as a cohort, our services at a higher rate actually than our existing customers do. So they seem to have like – they are liking what they have found. Again, we said – people are selling of plans above the 100 meg tier or 75%. Our unlimited data is selling in at about half of what it was pre-COVID. And that makes sense for several reasons, I think. Number one, we gave away unlimited data for free for months during the heart of the pandemic. And number two, we have so many people coming in at the 200, 300 gig level that the unlimited data option is not as imperative as it once was. That being said, we're seeing it grow. And it may get back up to pre pandemic levels. But it is the major contributor to our ARPU growth at this point in time.

And then on the deals, I think – Brandon, I think we're still working on exactly how we're going to communicate them. I think we've been very focused in the early stages of finding the opportunities, looking at them internally on how we think we can create value over time. And then figuring out how to best communicate that to our shareholders over time, while keeping in mind that these are private businesses and have their own plans and have their own competitors and things that they want to keep private. And so trying to find that right balance of how to tell the story about the investments and to allow them to run their businesses the way they want to run them. And we feel like we've partnered with really good teams who share our vision. And actually, one of the attributes that we like about these are the fact that a couple of them actually do have leverage and have more leverage than we do. So we're able to share in levered returns without us really putting our balance sheet at risk. None of that really done a pro forma of what that would look like because they're not – none of those are secured by Cable One at all. They all have their own facilities and are only secured by the assets they have. So we have no obligation to the debt at that level. And so we haven't really looked at it that way, but those businesses are north of 5 times leverage, which allows for higher equity returns in that environment without us really putting our balance sheet at risk at all to be able to do it. Does that answer your question?

Okay. Thank you. Sort off.

Well, at least I got a question this time. I think we increased our questions by 300%. Anyway. Well, Amanda, I think that's it.

Thank you. This does conclude our question-and-answer session. I'd now turn the conference back over to Julie.

Thank you, Amanda. I want to thank all of our associates for another great quarter and for their resiliency and dedication during these uncertain times. Thanks to everyone for joining us on today's call. We look forward to speaking to you again in the New Year.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.