Good afternoon ladies and gentlemen. Thank you for standing by. My name is Erica. And I am the conference operator today. At this time I would like to welcome everyone to the Cable One Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remark there will be a question and answer session. [Operator Instructions] Thank you. At this time I will be turning the call over to Jordan Morkert.

Good afternoon, and welcome to Cable One's Second Quarter 2023 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I would like to remind you that today's discussion contains forward-looking statements relating to future events that involve risks and uncertainties. You can find factors that could cause Cable One's actual results to differ materially from the forward-looking statements discussed during today's call 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 or GAAP. 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. During today's call, whenever we refer to second quarter results on an adjusted basis, we are excluding certain non-core assets we divested in the second quarter of 2022 which exclusively provided business services. Joining me on today's call is our President and CEO, Julie Laulis; and Todd Koetje, our CFO. With that, let me turn the call over to Julie.

Thank you, Jordan, and good afternoon, everyone. We appreciate you joining us for today's call. Before jumping into our second quarter results, I'd like to offer a couple of thoughts about our industry as a whole. Despite the current headwinds we and our peers face, the broadband business is strong and there is no industry we'd rather be in. We believe the long-term demand for connectivity will persist whether into the future, fueling the opportunity for growth. Fast and reliable internet is critical for today's consumers and data usage continues to grow as the average Cable One household now relies on 20 connected devices in their home, slightly higher than the national average. The connectivity business is growing and evolving and we are excited and ready for what the future will bring. That said, we persist in navigating this choppy environment confident in our long-term business and steadfast in the following fundamentals. We have a strong competitive position, which will become even more firmly rooted as we focus on innovative ways of delivering greater value to our customers. And we have a talented and entrepreneurial workforce of associates who are neighbors to our customers and long-term members of our communities, enabling us to contribute to the economic development of the cities and towns we serve. Now I will provide some highlights from the quarter before handing it over to Todd. Our ongoing financial results are a testament to our solid roadmap, which focuses on delivering seamless connectivity and superior service to our customers. In the second quarter, we delivered residential broadband revenue growth of 5.8% from the prior year, business services revenue growth of 1.6% on an adjusted basis, with data services within this segment meaningfully outperforming this rate. Adjusted EBITDA margin up 150 basis points from the prior year…

Thanks, Julie. Starting with revenue, total revenues for the second quarter of 2023 were $424 million, compared to $429.1 million in the second quarter of 2022, a 1.2% decrease. The decrease was primarily due to a continued decline in low-margin residential video and voice revenues, as well as the impact of the divestiture of non-core operations during the second quarter of last year, which contributed $1.1 million of business services revenue in Q2 2022. On an adjusted basis, total revenues were down by 0.9% year-over-year. Our business continues to be driven by the growth of our highly profitable residential data and business services product lines. For Q2 2023, our residential data revenues expanded 5.8% year-over-year when compared to Q2 2022, and our business services revenue grew by 1.6% for the comparable period on an adjusted basis. Data services within our business services segment meaningfully outpaced this growth. Given business services as reported, still includes video and voice revenues, which has similar characteristics to that of our residential segment. Operating expenses were $112.8 million, or 26.6% of revenues in the second quarter of 2023, compared to $118.4 million, or 27.6% of revenues in the comparable quarter of the prior year. A 100 basis point improvement, driven largely by a $12.6 million decrease in video programming costs. Selling general and administrative expenses were $86.2 million for the second quarter of 2023, compared to $90.8 million in the prior year quarter. SG&A, the percentage of revenue, was 20.3% to the second quarter of 2023, compared to 21.2% for Q2 of 2022, a 90 basis point improvement. Adjusted EBITDA was $231.3 million for the second quarter, an increase of 1.7% when compared to the second quarter of 2022. Our adjusted EBITDA margin for the second quarter of 2023 was 54.5%, a 150 basis point…

[Operator Instructions] Our first question comes from Greg Williams of TD Cowen. Greg, go ahead.

Great. Thank you. Just a question on the broadband subscriber trend. On the 5900 loss, how much do you think was seasonality? How much of that was a swing factor? Conversely, then, how much do you think an upswing or a pop will you see in the third quarter as you think about potential for ads to move back in positive territory? Thanks.

Hey, Greg. It's Julie. Great question. Looking at last year's change from first quarter to second quarter compared to this year, this year's was less. Doing any sort of precise comparisons previous to that becomes difficult because of pandemic, which did not follow typical seasonality and M&A and divestiture as well. What we saw in Q2 was less than the drop we saw last year. I think it is highly correlated to seasonality. As far as the third quarter, we don't give guidance as but if trends follow, it should be a good quarter.

Got it. Thank you.

Our next question comes from the line of Craig Moffett from MoffettNathanson. Craig, go ahead.

Thank you. First, just one clarification. You said mobile fixed wireless share is beginning to decline. Did you mean to say that the numbers themselves are actually declining or the net ads are declining? That is, are they actually losing subscribers? And then second, more subtlety, I wonder if you could just comment on your thinking about the MBI put call option that comes up in 2025, just how you're thinking about the cost and valuation and then financing.

Great. Craig, it's Julie. I'll take the first one. I'll let Todd take the second. We do have a third party researcher who gives us their estimates on share by marketplace. Share is quite low. Our coverage for both T-Mo and Verizon are approximately 40% of our footprint. We noticed last quarter, but it was quite small and it became more pronounced this quarter that there are markets where we are seeing that share as reported by this third party going in reverse. I can't comment on their net ads. I don't know what their net ads are. We don't see them. Our return rate is spectacularly low and that includes any losses to competitors in certain markets. So that just tells you how incredibly low it really is. So my supposition is that the majority, the vast majority of any connects that they would get in that 40% of our footprint would be coming from DSL, current DSL customers. And it looks like that share that they're having some difficulty in some markets.

It's helpful. Thank you.

Craig, good afternoon. It's Todd. On the MBI front, I know it covered this in the first quarter call and we've had some conversations about that, but just to reiterate and remind, that is an investment that we made in 2020 that has provisions associated with cable one having the optionality of buying in the remainder of the share that we do not own, which is 55%, and that window opened early this year and runs through mid-2024. That's at a fixed multiple. We don't disclose the multiple, but it's a multiple at which, based on market dynamics, I wouldn't estimate you'll see us affecting that as it relates to our commitment to doing accretive transactions as it then pertains to the put that you brought up that is in middle of 2025 from an election, likely late in 2025 from a funding requirement. So we feel very comfortable and confident in our ability to prepare for that. That business is performing extremely well. Everything, as I've said in the past, that we liked about that initial investment, we continue to like in terms of its growth rates, its cash flow conversion, its penetration, its rural competitive insulation, and the leadership team there that continues to do a fantastic job. So we're very close to our partner there. We have multiple partnerships with GTCR across our unconsolidated investment. There's a lot of winning strategies associated with that in our opinion for our shareholders, and I think that's the consistent message that I've delivered in the past that's helpful.

Yes, thank you.

Our next question comes to the line of Phil Cusick from JP Morgan. Phil, go ahead.

Hi guys, thank you. I guess following up first on the wireless side, what was that overlap maybe a year ago versus the 20% and then in terms of your incoming customers, are you seeing any sign that people are coming over from fixed wireless in any in any way faster or slower versus where they were a year ago? And then second of all, if I can, what's the exposure of the base to the price increase that you've done, and how should we think about that impacting our crew on the next couple of quarters? Thank you.

Great. Thanks Phil, Julie. I am not sure what fixed, I think you're asking what are overlapped with T-Mobile and Verizon's unlimited plan, fixed wireless plan was a year ago. And I don't have that number top of mind, but I certainly will get it and send it over to you. It would have been less, but I can't comment on how much last, right? As far as your follow on to that, are we getting an indication from [Kenex] that we are having that folks are coming to us from wireless? And the answer to that is yes. Specifically, I can think of a health call that I was on with two of our systems, and they were talking specifically about that. Can I quantify it for you to know? But yes, we have heard that some folks are coming to us from fixed wireless. The rate adjustment is a great question because the rate adjustment was expected against about a third of our residential customers. That $5 that we talked about went to about a third of our customers who had not experienced a rate adjustment in over eight years. And we are very cautious about anything that we do with our customers, or our customers are at the heart of our actions. We test in market, we have a third party research firm that we test customer perceptions with. We do several price elasticity studies per year, and we felt like this was something that we could do without causing harm. And in fact, I think that is the case. In terms of the ARPU that we saw from that rate adjustment, in this quarter, it was about equally from that adjustment and the continued upgrading of folks to higher speed, higher cost tiers of their own volition, of their choice. There will be more ARPU related to that adjustment in the third quarter. It did not all take place in the second quarter. I hope that answers your questions.

Thank you. If I could maybe push a little bit harder on the fixed wireless. Within the 40% that you've identified today, anything different in terms of performance in the business either over the last year as fixed wireless is ramped up, or in general, that you might be more vulnerable?

The issue for us right now is just everything has happened quite honestly since COVID. The whole world is different. There's, listen, there's plenty of penetration opportunity in our markets. Plenty. We don't have a concern about our connects barred down versus pre-pandemic historical levels. However, that is in all markets. So that means in our competitive footprint and our non-competitive footprint. So there is a dynamic that is at play that is not just related to competition. Other things are going on. It is the economy. It is the news related issue. Those sorts of things. So on that, go ahead.

I'm sorry, Julie. Phil it's Todd. I was just going to add to that because I think that really nails it. But when you think about what we just discussed as it relates to our ongoing trends and momentum in what the consumer demand curve looks like and the selling rates and the adoption rates, what we still remain very confident in is that we do not see a meaningful, it's hard to describe if any, but a meaningful amount of customers that are churning for that product. But to Julie's point, if it's impacting us, it's impacting us on the gross side of the equation in terms of the more benign connect activity.

Right, which is something that can be solved I think.

Thank you. And then Phil on the ARPU side, just to expand on Julie's last comment related to that, she mentioned about the third in terms of that $5. Recall as it relates to the very strong ARPU number that we reported for this quarter and the ongoing momentum there, that there are a couple other components there in addition to, of course, the consumer adoption as it relates to those higher speed tiers and higher capacity. It's also the $2 increase on the equipment that we enacted in Q4 that's still impacting on a year-over-year basis, as well as the mix shift that I talked about, the equipment, and then the $5, then recall last year in May, we did a $5 increase, but it was a $10 increase, apologies, but it came $5 for the first year and $5 in the second year. There was still a subset of those customers that got that second $5.

Got it. Thanks again.

The next question comes to the line of Steven Cahall from Wells Fargo. Steven, go ahead.

Thank you. Maybe first one on penetration. How do you think about just growing your market of potential subscribers? I think your data penetration was down just a touch year-on-year, but I know the network has expanded, but mostly how do you think about trying to get that penetration higher? I think it would assuage some of the fears around med ads if there was this opportunity to push that up five or 10 percentage points to where some of the peers are. Do you think there's something that structurally makes your market a little different in that high 30s or low 40s penetration is a natural ceiling? Then I've got a quick follow-up.

Steven, it's Julie. I do not think there's something structural in our markets that would preclude us from pushing penetration higher. I think we're at a point in time where we're sort of whiteboarding how to do business because business is different than it's been in the past. Not doing some one-off reactionary, but looking at a holistic, a cohesive strategic plan to address now very specific market and customer segments. I mean all customer segments so that we can get a fit between our overall pricing and packaging across those segments, offers perks, etc., all based on deep conversations and insights from our customers. It's work for us to do and we can do it.

Great. Then just digging into the ARPU one, which I think you're probably going to get a question from every analyst about. Should we think about the 6% is kind of continuing into the third quarter maybe until you start to lap the modem price increase? It sounds like the upteering is a pretty big piece of that. I don't know if you continue to think that the upteering tailwind in ARPU is going to continue or if that might have been a little more idiosyncratic to some of the changes you made in the second quarter. Thank you.

I don't think I will give guidance as to what I think it will be going forward. Only that we didn't do something in the second quarter in terms of the upgrading that I wouldn't imagine continuing. As a matter of fact, the gig sell-in is just a number that I would point to that continues to accelerate. In our markets, by and large, you're not doing mass media because we're just a tiny part of the DMA. For us to do marketing, it really is grassroots and growing marketing to get the word out. People are hearing about gig and it's a great value and I expect that to continue as well as the washover from the rate adjustment both on that third of the customers and the modem adjustment as well. Now, I would caution, we're looking at, as I mentioned earlier, that we're looking at striving to find a balance between unit growth and ARPU. Balance doesn't mean that everything is exactly the same, that each lever is the same, but that you're balancing the levers based on customers' needs and perceptions. I would throw that out as a caution.

Thank you, Julie.

Our next question comes from the line of Frank Louthan from Raymond James. Frank, go ahead.

Great. Thank you. Can you talk to us a little bit about on the video side? Losses slowed a little bit. Where do you think that sort of bottoms out and are you kind of hitting that wall? We're stubborn customers there. Then what do you think is having the bigger impact on the subtrends currently for data? Is it household moves or is it competition or still a combination of effects?

Tom might have more to comment on, but as it relates to video, Frank, we don't sell video. There's no end coming into the bucket. It's just out going out of the bucket. Where do I see it going? I think we have been pretty vocal about this for 10 years now, saying that customers have a lot of other choices that, quite honestly, are more economical for them than being forced to take a package that we're forced to take programmers. We're pretty low in video penetration right now. I think it continues to decline and it's of little risk to us as it affects revenue way more than it does EBITDA. [indiscernible] go ahead. Go ahead.

I was just going to add on the video side, and then you can go to the data side, but Frank, Julie's spot on. It's a smaller base, so the percentage will probably start to decline a little bit when you're declining off the smaller base until it's the, as we've discussed in the past, the when not if moment. There is still a lot of revenue in it. There's not a lot of margin in it, but there's still some margin in it. We're very focused on the strategy that makes the most sense for those customers first and foremost. In many cases, the demographics associated with those customers are a little bit higher skewed on the elderly side. Transitioning them into a digital environment off that [indiscernible] video is something that takes a little bit more hand holding in some of our markets, which we're doing. We view that as an opportunity in many cases to continue to introduce our data product or extend additional services in our data ecosystem to those customers, but that's just a little bit of a timing dynamic. We want to make sure that as we're looking at the when not if dynamic that we're also very proactively addressing the cost allocation.

Yes, related to subtrends, remember that we're very geographically dispersed. The size of our markets averages about 18k homes past. Any competitor that would affect us is not the same as it might affect a more consolidated [indiscernible]. That being said, it's uncanny that the same dynamics are happening related to Connect specifically in both competitive footprints and footprints where we literally have no one else providing a wired product or even unwired of 100 megs or more. So there's definitely another phenomenon at play and my guess is it is economic and related. So it's both of those things.

Okay, great. Thank you.

Our final question comes from the line of Brandon Nispel from Keybanc Capital Market. Brandon, go ahead.

Great. Thank you. Thanks for taking the question. I think I have a bunch of follow ups. Julie, you mentioned three key would be a good quarter. Can you just handicap that for us? Is that positive meta ads? I would assume. Secondly, you mentioned a third of your customers received the price increase, but you also mentioned fidelity customers. So as a third of the total customer base that got the price increase. And then on that price increase, you also mentioned it was in May. Is that a one and a half quarter benefit this quarter or a one month benefit where it hit in bills on bills in June? And then my question, those are all follow ups, is really for Todd and with a low transaction environment, would have thought things like truck rules, customer care costs would actually be lower. Can you maybe give us an update in terms of your thoughts on OpEx trends for the rest of the year? Thank you.

Great. All right. So to clarify, I did not say that third quarter would be good quarter. I said that third quarter is usually a good quarter seasonally. So that is my expectation. That is what we're heading for. We're putting in a lot of effort into the back to school period because it typically does bear fruit. Third of the customers, overall brand in. So all the customers, third of all of our customers, it happened in mid May. So only a part of the second quarter got the benefit of that. And I think your next question was for Todd related to OpEx, which gosh, I thought was doing pretty well, but --

Yes, I like the 100 basis point improvement year-over-year. Sequentially, it's pretty flat on a percentage, which is what you might be pointing out, Brandon. And I would say the low transaction environment does offer us an opportunity to focus on some of the costs, both the OpEx, as well as the cap X, you'll see that the CapEx dynamics were meaningfully lower than run rate, some of that timing on projects. But a lot of that, as I mentioned in my prepared remarks, around working capital optimization and just some growth related dynamics on the OpEx side, also keep in mind is that second quarter is when we enact our annual wage increases for our associates. And we will continue to reiterate that our number one investment always will be, in our team and in our culture. And we did have those roll through in the second quarter. So while you might have a little bit lower transaction environment, not the OpEx driven by the annual wage increases offset that slightly.

Great. Thank you very much for taking all the questions.

Bet. we appreciate you.

That concludes our Q&A. I will now turn the call over to Julie Laulis for closing remarks. Julie, it's yours.

Thank you. Thank you Erica. Appreciate all your support today. As always, I want to thank our associates for their incredible work on behalf of our customers and Cable One. We appreciate everyone joining us for today's call. And we look forward to speaking with you again next quarter. Thanks, everyone.

Ladies and gentlemen, that concludes our call today. Thank you for joining. You may now disconnect.