Cable One Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One 4th Quarter and Full Year 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Todd Cucci, Chief Financial Officer. Please go ahead.

Speaker 1

Good afternoon, and welcome to Cable 1's 4th Quarter and Full Year 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 SEC filings, including our annual report on Form 10 ks. Cable 1 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.

Speaker 1

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. When we refer to free cash flow during today's call, we mean adjusted EBITDA less capital expenditures as defined in our earnings release. 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.

Speaker 1

During today's call, whenever we refer to our results on an adjusted basis, we are excluding certain non core assets we divested in the Q2 of 2022, which exclusively provided business services. Joining me on today's call is our President and CEO, Julie Wallace. With that, let me turn the call over to Julie.

Speaker 2

Thank you, Todd, and good afternoon, everyone. We appreciate you joining us for today's call. With nearly a decade under our belt as a public company, I'd like to start off today's call with a brief reflection on our contrarian roots and how I believe they contribute to our success today and into the future. We have always been a different kind of operator. Our safe harbor strategy that concentrated on small cities and large towns, early pivot away from video to broadband and focus on attractive Roaring broadband acquisitions are just a few examples of how we have set ourselves apart from other providers in the past.

Speaker 2

Today, we continue to lean into those contrarian roots, leveraging our differences and evolving for the future. We have a plan to achieve balanced growth over time, a robust infrastructure to support customers' increasing needs for bandwidth in a diversified rural footprint where our local operations and the neighborly experience we provide is a meaningful differentiator. We believe this combination will continue to drive high margins and generate significant free cash flow. In the Q4 of 2023, Cable 1 was among the few operators who grew customers, expanding our residential broadband base by more than 1600 customers. Notably, this growth was driven by both an improvement in new connects year over year and sustained load churn rates.

Speaker 2

We have reengineered our go to market approach to strategically target new customer segments with attractive pricing and product offerings, deployed countermeasures to address competition and expand our network footprint. We believe these changes to our tactical plan drove our results. This customer growth momentum began at the end of the third quarter persisted throughout the 4th and continues to date. Similarly, our unconsolidated investments continue to show strong customer and financial growth. While we are focused on increasing our residential market share, we also understand the importance of achieving balanced growth over time.

Speaker 2

Our ultimate financial objective remains to consistently generate significant free cash flow for our investors, something we accomplished again in 2023, reaching yet another all time high for full year adjusted EBITDA less capital expenditures with a 9.7% growth year over year. This underscores our ability to perform financially even amid challenging market conditions. We generated this free cash flow while continuing to invest in our already robust network ensuring we remain ahead of the consumption curve. Nearly a quarter of our residential Internet customers now use more than a terabyte of data per month, a 17% increase over the same period last year. We have managed this surge effectively as overall network utilization during peak hours remained at approximately 20% for both downstream and upstream traffic.

Speaker 2

Given this available capacity, we are well positioned to moderate our capital spending in support of our efforts to sustain a trajectory of continued free cash flow growth over the long term. As always, we remain steadfast in our commitment to maintain a network so robust that our customers never second guess the reliability of their service. Beginning in the Q4, we increased efforts to broaden our reach by marketing to value conscious customers in ways we haven't previously emphasized. We also introduced value added benefits such as free unlimited data to retain the customers we have served exceptionally well for decades. And we have surgically implemented changes to our pricing and packaging to broaden our appeal among new and existing customers.

Speaker 2

We are pleased with the early results we are seeing and we will continue making significant investments in our marketing and branding strategies to ensure our message reaches a wide audience. Although we face some wired competition, we anticipate that our footprint will remain relatively less competitive than urban markets, providing meaningful opportunities for increasing penetration. However, when a new provider prepares to enter one of our markets, we are ready to respond aggressively price. We have a clear understanding of the capital constraints and the return dynamics faced by new entrants to our markets, especially during times of heightened capital and construction costs. We believe that these dynamics, coupled with our responses, have already caused potential newcomers to rethink their entry into some of our markets.

Speaker 2

In terms of wireless competitors, it bears repeating that we believe Cable 1 offers a superior service and our new value based offers go head to head on price. Fixed wireless is known to have capacity limitations with recent reports indicating usage limits and potential throttling. In contrast, our network effortlessly accommodates customers with high data usage needs. It's worth noting that across our footprint, our new customer offers include unlimited data, underscoring our ongoing commitment to listening to our customers and prioritizing their needs with the services we provide. Our efforts to strategically target value conscious customers and fiercely compete where necessary resulted in downward pressure on ARPU for our residential data customers during the Q4.

Speaker 2

We anticipated this and expect that we can continue to effectively manage ARPU going forward as we fine tune our tactics to achieve balanced growth over time. Although targeting the value segment is expected to pressure ARPU in the near term, we view this as an acceptable trade off for defending our markets, expanding our customer base and enhancing long term value. As I said earlier, we understand that achieving balanced growth is essential for our long term success and we believe we are currently taking the necessary steps to achieve that. Ultimately, our philosophy aligns with the wisdom of the late, great Charlie Munger, who consistently sought partnerships with companies that generate substantial cash flow. In 2023, despite competitive and economic challenges, we achieved our highest level of free cash flow ever.

Speaker 2

With our focus on subscriber growth in 2024 and discipline over operational and capital expenditures, we are poised to continue growing free cash flow over time. Before I turn it over to Todd, I want to emphasize that the heart of our operations is a personal approach to service delivery. This is another differentiated aspect of our business model. It is rooted in the fact that a majority of our associates and a substantial number of leaders are integral members of the communities in which they live and work. Our customers are their friends and family.

Speaker 2

Their loyalty and trust matters to our associates. I recently heard a story from one of our systems that beautifully illustrates this commitment. 1 of our hard grade technicians was on a service call to troubleshoot a video problem for an elderly customer. As it turned out, it wasn't an issue with our video service. The customer's TV was broken.

Speaker 2

Recognizing financial position to purchase a new one, the technician unbeknownst to anyone purchased a brand new TV out of his own pocket, delivered it and set it up for this customer. I could share dozens of similar examples, but I'll simply reiterate our people truly are the backbone of our company and our success. And now Todd who will provide a full recap of our Q4 and full year financial performance.

Speaker 1

Thanks, Julie. Before discussing our 2023 full year results, I'd like to start by touching on some of the key quarterly figures from our Q4 financials. For the Q4 of 2023, our total revenues were $411,800,000 a 3.2% decrease from the Q4 of 2022, driven by a 21.3% decrease in residential video revenues. Residential data revenues, however, increased 2.1% year over year with PSUs growing more than 1600 during the Q4. Business services revenues declined 0.5% year over year, whereas data services revenue within the business services offerings exceeded the comparable residential data revenue growth rates.

Speaker 1

Net income was $115,300,000 for Q4 2023 compared to a net loss of $77,200,000 in Q4 of 20 22. Adjusted EBITDA was $226,900,000 a decrease of 2.7% when compared to 2023 as revenue gains in data services were outpaced by revenue attrition rates in the video product. Adjusted EBITDA margin expanded 30 basis points to 55.1% year over year. Capital expenditures totaled $115,600,000 in Q4. During the quarter, we invested $21,900,000 of CapEx for new market expansion and $9,400,000 for integration activities.

Speaker 1

Our Q4 capital expenditures were elevated due to timing of strategic projects with the completion of several large initiatives and the launch of new ones. We also capitalized on opportunities to procure discounted equipment for future network expansion, particularly for enhanced ACAM projects backed by 15 years of government funding. Additionally, we accelerated the deployment of our wall to wall Wi Fi products, which has significantly enhanced the customer experience and bolstered retention rates. These investments reflect our commitment to long term growth and operational excellence. Adjusted EBITDA less capital expenditures decreased from $126,400,000 in the Q4 of 2022 to $111,300,000 in the Q4 of 2023.

Speaker 1

This decrease is primarily driven by the higher capital expenditures incurred in the 4th quarter of 2023 as previously mentioned. Now turning to our full year results. Starting off with revenue. Total revenues for 2023 were approximately $1,700,000,000 a decrease of $28,000,000 or 1.6 percent from 2022. On an adjusted basis, after taking into account the divestiture of certain non core assets in the Q2 of 2022, total revenues declined 1.4%.

Speaker 1

The decrease was driven largely by the continued decline in revenues from our lower margin deemphasized residential and business video product lines, including a $67,200,000 decrease in residential video revenues. The growth of our most profitable residential and commercial broadband product lines continues to drive our business forward. As the demand for reliable high speed broadband expands across all customer groups, so does the confidence in our continued success and ability to strike the right long term balance between subscriber growth and ARPU. For 2023, our residential data revenues grew by $44,700,000 or 4.8 percent when compared to 2022. Year over year, business services revenues declined 0.2% but grew approximately 1% on an adjusted basis.

Speaker 1

And as mentioned earlier, data services within our business services offerings experienced healthy growth during the year. Operating expenses were $440,900,000 or 26.3 percent of revenues in 2020 3 compared to $470,900,000 or 27.6 percent of revenues in the prior year, a 130 basis point improvement, driven largely by a $49,900,000 decrease in video programming costs. Our focus on innovation and investment has led to significant efficiency gains, including a 25% decrease in average monthly truck rolls per 1,000 customers and a 16% drop in contacts per customer since 2020. These advancements, along with our disciplined approach to cost management, demonstrate our proactive strategy in aligning with decreasing video revenues. Selling, general and administrative expenses were $354,700,000 for 2023 compared to $350,300,000 in the prior year.

Speaker 1

SG and A as a percentage of revenue was 21.1% for 2023 compared to 20.5 percent for 2022, with the increase driven by marketing and branding initiatives, higher labor costs and meaningful investments that we are making in software and service platforms. These are driving ongoing digital transformation initiatives in the areas of enhanced customer and associate experience. Adjusted EBITDA was $916,900,000 for 2023 compared to $911,900,000 for 2022, an increase of 0.6%. Our adjusted EBITDA margin for 2023 was 54.6%, representing a 120 basis point improvement compared to the prior year. Capital expenditure totaled $371,000,000 for 2023, which equates to 40.5 percent of adjusted EBITDA compared to $414,000,000 45.4 percent in the prior year.

Speaker 1

Our capital expenditures have trended downward over the past 2 years, thanks to the meaningful investments we've already made in our network, specifically with the DOCSIS 4.0 network architecture. The significant excess capacity generated by these investments provides us with the confidence to manage our total capital expenditures towards the low 300s for 2024. Adjusted EBITDA less capital expenditures was $545,900,000 for 2023 compared to $497,800,000 for the prior year, a nearly 10% increase. We will continue to evaluate application of the meaningful cash flow that this business generates and stay rooted in our philosophy of long term oriented investments and conservative balance sheet management. We will remain balanced across network investments, digitally oriented platform investments, organic and inorganic growth opportunities and continue a diversified return of capital strategy consisting of disciplined debt repayment, consistent dividends and opportunistic share repurchases.

Speaker 1

In 2023, we distributed $66,300,000 in dividends to shareholders, bought back over 141,000 shares for $99,600,000 and repaid $163,700,000 of debt, of which $150,000,000 represented volunteer repayments of our outstanding revolver balance. As of December 30 approximately $190,000,000 of cash and cash equivalents on hand. Our debt balance was approximately $3,700,000,000 consisting of approximately $1,800,000,000 in term loans, dollars 920,000,000 in convertible notes, dollars 650,000,000 in unsecured notes, $338,000,000 of revolver borrowings and $5,000,000 of finance lease liabilities. We also had 6 $62,000,000 available for additional borrowings under our $1,000,000,000 committed revolving credit facility. Earlier this week, we repaid an additional $50,000,000 of revolver borrowings, further reducing our go forward debt service costs, our floating rate debt balance and expanding our unfunded committing revolving credit capacity.

Speaker 1

Our weighted average cost of debt for 2023 was 4.22%. Our net leverage ratio on a last quarter annualized basis was 3.85 times and the vast majority of our borrowings are either fixed issuance or have been synthetically fixed under long term contracts, considerably mitigating our exposure to the prevailing rate environment. Additionally, the nearest final maturity for any of our debt instruments does not incur until 2026. In addition to the other investment activity previously discussed during the year, during the Q4 we invested the remaining $13,900,000 under our subscription agreement with Ziply Fiber, bringing our total investment in this growing fiber provider to $50,000,000 Looking at our unconsolidated investments, in total residential and business data customers grew by approximately 9,800 or 1.2% on a sequential basis in the 4th quarter and more than 83,600 customers for the full year 2023. This does not include the operations of MetroVet, where we have a less significant investment.

Speaker 1

The ongoing expansion of these businesses reinforces our enduring strategy of collaborating with experienced management teams and partnering with the most reputable financial agencies in the sector. Before we turn to Q and A, I'd like to address the Affordable Connectivity Program, also referred to as ACP, for our broadband customers. While it is still possible Congress might provide funding to continue the program, we are prepared for the likelihood that funding for the program will be depleted by April. We've initiated communications and are taking proactive steps to prepare for the potential impact on our approximately 50,000 ACP subscribers. It is important to note that less than 20% of these customers have a plan fully funded by ACP, while our other ACP customers subscribers who pay for a portion of their current plan.

Speaker 1

We understand that the end of the program could be disruptive for many. However, we've carefully mapped out the most appropriate landing places based on our customers' financial and usage needs, and we are committed to ensuring the smoothest possible transition. Additionally, we see this as a potential opportunity to gain new customers as the lapse in funding might prompt those not satisfied with your existing provider to explore alternative Internet service providers. With that, we are now ready for questions.

Operator

Thank you. The floor is now open for your questions. Your first question comes from the line of Mick Alou with JPMorgan. Your line is open.

Speaker 3

Hey, good afternoon. Thanks for taking the question. First on the broadband ARPU deceleration, thanks for the discussion on the low end offers pressuring ARPU here. But I'm curious what the impact may have been from the existing sub base like the retention offers you mentioned or if there's been any down tiering or anything that you've noticed? And then second, Todd, on the balance sheet, you mentioned net leverage at 3.85 times now.

Speaker 3

How do you view the target leverage for the company here? And then as we look out 2 years, given potential funding for MBI and having to take on that balance sheet, how do you think about how MBI could impact your target leverage range? Thanks.

Speaker 2

I'll start out, Nick. It's Julie. So yes, we have had some we've been more willing to do promotional and discounted offers, especially targeted at the value conscious segment. And that is a change or an evolution from our past where we were more specifically concentrating on the higher end LTV customers. We've also done some pricing and packaging changes and some what I would call pretty strong competitive response actions in just a few markets and we've seen really good results from that.

Speaker 2

What do I call good results? Well, I'd say if an overbuilder pulls a contractor, that's a good result. If an overbuilder stops building in our area, that's a good result. If we are actually growing in that hyper competitive market, that's a good result. And those are all things that we have seen from that type of response.

Speaker 2

In terms of cannibalization, if I look at something as simple as sell in, about 80% of our new customers are coming in at the 300 meg level or above. So I still think we're doing well in the majority of our markets, but we have taken some strong responses to ensure that we are defending our marketplace and growing our data penetration rates.

Speaker 1

And then Nick, it's Todd on the balance sheet side of the equation, Julie nailed most of the key points on ARPU. As you know, Cable 1 has always maintained a philosophy of a very conservative balance sheet. We don't have a target leverage profile per se, but we've operated the business throughout various economic environments in that kind of 2.5 to 4.5 times leverage range. We were comfortable taking the leverage up to that 4.5 or near that with the Heart Rate transaction. We also were issuing capital at near 0% interest rate.

Speaker 1

So it's not only just about the multiple, but it's also the as you can see from the disciplined repayment that we've been enacting here in the last few quarters and we'll continue as we're moving that debt balance down that reduces our highest tranche of capital, which is our floating rate debt under the revolver. It also enhances our unfunded committed revolving capacity under that $1,000,000,000 committed revolver that we extended earlier last year with a syndicate of our relationship banks. And all of that was very intentional as we think out to your other question of the prospects of preparing that balance sheet for events like an MBI. And we feel like that transaction and the timing associated with that transaction will align with that leverage range that I outlined previously to you.

Operator

Our next question comes from the line of Greg Williams with TD Cowen. Your line is open.

Speaker 4

Great. Thanks for taking my questions. Julie, you mentioned the need for balanced growth, and you'll see some pressures on ARPU in the near term. And yes, it could be an acceptable trade off. I'm just wondering what does near term mean?

Speaker 4

How do we think about the ARPU pressures over the next few quarters and through the year as you sort of target the low end and play some defense? And also just second question is buybacks

Speaker 5

do seem to be on

Speaker 4

the back burner. Todd just mentioned shoring up the balance sheet. So is it sort of safe to figure while the stock is down at these levels, the balance sheet, repair is prioritization here? Thanks.

Speaker 2

Great. So yes, pressure in the near term, we are we've operated in these small cities, large towns. And just because we're in communities that are not urban, doesn't mean that these folks are getting a substandard network. And in fact, the opposite is true. We were one of the first operators, if not the first, to offer a gig service, for example, back in 2015.

Speaker 2

We have symmetrical multi gig service across our HFC plant, although the majority of those plants is fiber now. And we have been operating in these markets for decades. And I give that to you, Greg, as context that we are going to defend our markets and we are going to grow market share. So I do see a near term pressure as we defend some markets. It's nice that we're dispersed across 24 states, remembering that our average market size is 20,000 customers.

Speaker 2

So an impact of a competitor anywhere is not an impact to us overall. But we're going to have to take you on this journey with us. We're experimenting and learning and we're being really methodical. We're trying to be incredibly segmenting the marketplace, very targeted so that we can balance ARPU in different types of markets overall. Over a multiyear period, I think we are going to show nice growth overall, but it is going to be a journey.

Speaker 2

As always, our focus is on taking care of our associates, our customers and generating significant free cash flow. So I'm not overly concerned about revenue in the short term.

Speaker 1

And Greg, one thing I'll just add on that, I mean, we talk about ARPU a lot. It's a very key factor from an economic perspective, but we have a multidimensional playbook in terms of the behaviors at which we're both looking at customer acquisition as well as customer retention. And we're big believers in that acquisition and that retention of those customers is key to our long term value creation for our owners. And we've talked about where our penetration rates have been extensively in the past and we feel we can continue to demonstrate to our shareholders, our associates, our communities that we can be the leading provider in these markets and expand that penetration. And that's what we're doing.

Speaker 1

As it relates to the balance sheet, I wouldn't call it repair it, I think was the term you used, because we've always been very balanced in how we've utilized the balance sheet, both from debt issuance and the cost and the term of that. So we feel like it's very long term, highly fixed and puts us in a great spot to be in a good position to grow. We did pull back on the buybacks in the last few quarters. You saw I'll remind the audience that we did issue in 2020. We issued equity and we bought back almost 150 percent of the number of shares that we issued in 2020 at a nearly 50% discount to the price that we issued at.

Speaker 1

And as we think about investing in ourselves, it's always investing in the network, investing in our people, it's investing in ourselves in many cases through the buyback of shares. But we also very much do believe in the return of capital to shareholders and running a long term business is the discipline around borrowing and repaying debt. And that's credibility with our creditor partners and I think that's credibility with our shareholders as well. So we will be maintaining a balance there, but as we prepare the balance sheet for future events and want to continue to maintain that conservative philosophy, you will see us be a little bit more focused on debt repayment. We're not big believers in the perpetually leveraged business model.

Speaker 6

Got it. Understood. Thank you.

Operator

Next question comes from the line of Frank Louthan with Raymond James. Your line is open.

Speaker 7

Great. Thank you. So you've built quite a bit. I mean, you passed about 70,000 homes for the year, yet still kind of losing subs. What's sort of the take rate on the new homes passed?

Speaker 7

And when can we start to see that begin to add to the level of subs that you see growing? And at what point do you think it's you can kind of call a win there and see positive broadband subs for a full year?

Speaker 2

Frank, I'll start with that one, Todd. Feel free to jump in. But the homes path that you see came on in the last half, really the last quarter of the year, which actually makes me think about how we approach, how we build. But those will become homes. I mean those will become customers.

Speaker 2

A lot of that is fill in some of that is building new plant for new developments, but a lot of it is fill in, meaning a home has just popped in where we already have planned. And I actually went through every single one of those that was built. And the penetration rates there match the penetration of their systems if the tenure is longer than a quarter. And in the majority of the case here, it is not. So these represent opportunities for us in 2024.

Speaker 2

I'm not going to comment on what I think about 2024's growth. What I will say is we are concentrating on growing in 2024 and leave the guidance out of it.

Speaker 1

Yes. And Frank, as you saw for the quarter, CapEx was considerably higher than where it was in Q2 and Q3. And we talked about it's hard to very it's hard to be super predictable on what a quarter to quarter CapEx is even though the full year CapEx came in below where we've run-in the past. And as I outlined in my remarks, we'll be lower in 2024 as we manage expectations to that kind of low 300s or what I would call the low end of that 35% to 38% as a percentage of EBITDA that we've talked about in previous quarters. But you can see also that that CapEx moving up in the 4th quarter does correlate to many of those projects that were being completed, had some timing elements associated with them, but also even a few that we initiated as new ones that came with long term support from the enhanced ACAM regulatory programs.

Speaker 1

So they will be opportunities for sure for us to prosecute in 2024.

Speaker 7

Okay. Thank you. And just to be clear, so you're saying when you mostly these areas that you build after 1 quarter, you're at mid-thirty percent penetration on those homes?

Speaker 2

No. I'm saying if they've been homes for a period of time. So we watch them every single week to tell you the truth. But these are these only have a week, a month, 3 months in the barn. So their penetration rates are not as going to be as high as the system that they exist in.

Speaker 2

But over time, those new build areas will match the average system penetration or be higher.

Speaker 7

So how long does that take for them to match the existing system?

Speaker 2

It really, Frank, it would depend on what system we're talking about. Is that a system like, well, I won't say the name because I also know competitors listen. Is that a system that doesn't have a competitor other than the LEC? We're going to get there pretty fast. Is that a system with 2 fiber overbuilders and a Leq?

Speaker 2

It's going to take us longer.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from the line of Craig Moffett with MoffettNathanson. Your line is open.

Speaker 5

Lee and Todd, I wonder if you could just add a little bit more color to the kinds of offers that you're using when you talk about competing with, it sounds like you're mostly talking about offers to compete with new fiber entrants. But are you also doing offers that are aimed at competing with fixed wireless broadband? And if so, how do those look different than what you're doing in specific geographic markets where you're facing a fiber competitor?

Speaker 1

Yes, Craig, Julie can jump in as well. But one of the things we talked about in our Q3 call was where we had rolled out initially focused on both that value segment, but also to go head to head with that fixed wireless mobilely architected broadband product was that 100 meg service at $25 as a promotional price. And with that, what was really more of called I'll call the flash sale in late Q3, which we piloted different types of offerings in Q4. We saw the sell in of those initial offers come in meaningfully higher than the tier that was being offered with that promo, if that makes sense. So in Q3, it was well over 2 thirds of customers that either called in for that offer or came in for that offer.

Speaker 1

Our great sales team was able to convert them higher based on their needs and listening to their needs and what their average monthly utilization and capacity requirements were. And we see that continuing here in the Q4 and to date. But we feel it's both. We feel it's like making sure we go to all cohorts and all segments in these towns and communities that we serve, but ensuring with a better and more reliable product, we can compete head to head with that fixed wireless offering. And you have to also be mindful in many of our markets, We've talked about this in the past, a fixed wireless offering is based on the mobile network infrastructure in these markets.

Speaker 1

And while it's not to say that some of our markets don't have good service, many of them do not. And not being able to offer a great wireless product in our markets definitely doesn't be asked the opportunity to provide a reliable home broadband on a mobile architected infrastructure either.

Speaker 2

I guess I would just add that this is a pretty big shift for us and that we are not operating our systems any one size fits all way. We are innovating, we are testing, we are learning, we are trying things, we are measuring to see what drives the needle. We're talking to our customers. And it's not just about price, Craig, it's the whole customer journey that we're taking a look at, anything from what's their Wi Fi experience like and making sure that we're measuring their experience to the device, not just to the node, but every device in their home, for example. And just having a maniacal focus on reliability and using the tools of this century machine learning and AI to grab the data points that we have and take care of issues before they even become noticeable by customers.

Speaker 2

So it's a pretty multidimensional look at how we approach the customer segments.

Speaker 5

Can you say anything about are these offers primarily 1st year discount, stepping up to a regular price as a 2 year discount or are they an everyday low?

Speaker 2

It's all over the board. It's all over the board. There's some of that. There's some that are shorter term. There's some that are longer term.

Speaker 2

There's some that are multi step up over years. We're testing all of it and learning what the whole picture looks like, not just the take rates, meaning customers coming in the door, not just the selling rates of what packages they take when we market that, but what are the retention rates on the backside and the satisfaction as well.

Speaker 1

But it's very tactical, Craig, to the market and to the competitor. And I think our knowledge of who these competitors are, how they're capitalized, where they are in their, in some cases, financially backed investment cycles and determine many of the different strategies that we approach and we'll continue to use. But in some cases, we're already seeing people raise price in those markets. And so we also have to be very mindful of the tenor of those, so that you can also respond in that way. And so it's as Julie said, it is across the board, but it's very tactical.

Speaker 5

All right. Very helpful. Thank you very much.

Operator

Our next question comes from the line of Steven Cahall with Wells Fargo. Your line is open.

Speaker 8

Yes, thank you. I was wondering if we could just tie all this all together to talk about EBITDA growth a little bit. So certainly appreciate that you're experimenting and not doing the one size fits all approach anymore. And it sounds like, Julie, you said there's going to be a bit of a journey here, so there might be a little more pressure on revenue growth than there has in the past. EBITDA was a little weaker in Q4.

Speaker 8

So we'd just love to hear how we should think about EBITDA growth in 2024. And the second part of the question is with the more moderate capital spending in 2024 that you talked about, Todd, I think there was some pull forward of like scalable infrastructure spend in 2023. But is any of the moderation in capital spending just a response to a tougher competitive environment that may slow EBITDA growth? And so that will just help you kind of keep the balance sheet conservative? I know that's a lot.

Speaker 8

Thank you.

Speaker 1

Yes. I'll hit on a few things there, Steve. Thanks for the question. On the EBITDA growth side, I mean, right now, as you guys know, while we're at 5% penetration on video, that continues to be an accelerated decline and it still does have some margin in it, although it's also a declining margin. And that is one of the primary contributors to that EBITDA this quarter over quarter being slightly down as you saw, I think it was like 120% of our revenue declines were video as our core products were up.

Speaker 1

As we continue to focus on long term customer growth, acquisition of new customers, retention of existing customers and that long term reliable experience for them. It's going to be that factor that we have to continue to learn from, right. And we have to continue to focus on how can we expand that penetration. And as Julie was outlining, it's not just about price, but price will be a tool in certain areas where we feel it's most appropriate. But the video decline is your core contributor to where the EBITDA weakness is.

Speaker 1

But again, as you see margins increasing this quarter, our highest margin products continue to be the healthiest. As it relates to the spending, I wouldn't say it's in a response to a tougher environment. It's really as a result of how proactive we've been in investing in these markets. 4.0 architecture is basically complete until the actives are generally available, but we've been spending considerably in that. We did bring forward some discounted equipment.

Speaker 1

We did accelerate some projects related to the government programs that we're going to be funding those for the next 15 years. So that was in for the most part some of the incremental investment and throughout 2023 even 2022 when you think about the proactive network investments, but then some of the, I'll call it, pull forward into Q4. But the go forward is because of how proactive we've been in investing in the network.

Speaker 2

And I might add, capital expenditures This is This is a trend. This is where we've been going. I would also note that we're pretty well known amongst our peers for being pretty good at continuous improvement as it relates to being cost effective. I think you see that in part by our margins. And that is going to continue and ramp up and we are having a full court press on integrations in 'twenty four as well.

Speaker 2

So bringing all the family of brands that are not yet Sparklight into the Sparklight brand and getting them on our platforms and just a tremendous amount of operational work going on by amazing teams in 24 that will help us on that side of the business as well. And since I've been with the company, which is almost 25 years now, our focus has been on free cash flow and it's going to continue to be. Great.

Speaker 6

Thank you.

Operator

And we do have our last question from Brandon Nispel with KeyBanc Capital Markets. Your line is open.

Speaker 6

Okay, great. Most of mine have been addressed, but I was wondering if on ARPU, I was wondering if you could quantify one time impacts this quarter. I think you mentioned 2 things, removing data caps and providing unlimited data. So I was hoping you could quantify in terms of the impact on HSD ARPU. And then on your website on the Sparkleg page, there's a 1 gig service for $39.95 for 18 months.

Speaker 6

And historically, you guys have not been as promotional on the front book and especially not for that period of time. So I was hoping you could talk about, 1, what the reception has been and 2, the decision behind putting that as sort of the lead product? Thanks.

Speaker 2

Okay. Let's see ARPU. Yes. So breaking down what happened to ARPU in the Q4, which is what I think you're asking for Brandon.

Speaker 6

Yes.

Speaker 2

Yes. Okay. So the majority of the decrease came from promos and discounts with a piece of it coming from rate and the sort of gifting back of data, if you will. So new customers that come on in certain markets yet data, unlimited data included in their package rates. Package rates have stayed the same in those markets, They're getting unlimited as sort of a perk if you will where we used to have data guidelines and that would result in fees to us.

Speaker 2

So if you're a new customer in those markets, you don't have that anymore. The $39.95 I'm trying to look and see what marks it is literally one size does not fit all. Every almost every market or every segment within a market has some element of variable pricing. So if our normal rates are still 70, 80, 90 for 300, 600 gig. You could see promos in the marketplace, but generally speaking a promo for a gig would be $69.95 or $70 So if you're looking at a rate of $39 you're looking at a market that is, I'm trying to find one.

Speaker 2

Let's see. Do you know what market you looked at? Because that

Speaker 6

I just sparklight.com. Yes. The main landing page.

Speaker 2

Yes. You would have had to had market ZIP code I think. But there are markets where we are offering that and those are hyper competitive marketplaces and we're driving gig selling and we believe that in the future we'll be able to monetize that more. But the other piece of that is the sell in that in part is to get the phone to ring right. In those markets, we might actually have a multi gig product that we could upsell on unless we're seeing some of them.

Speaker 6

If I could follow-up, you mentioned 80% of your customers you're selling is at 300 megs or above. What type of intake ARPUs are you seeing with the service? And then I wanted to ask about ACP since you mentioned, I think it grew quite a bit sequentially. I think last quarter you mentioned you had 35,000 customers on ACP. Now it's 50.

Speaker 6

So that implies sort of the base core customers were down quite a bit this quarter. So hoping you could unpack that a little bit. Thanks.

Speaker 1

Yes. Hey, Brandon, on the ACP side, it's a little bit north of 35, but down to a little south of 50. I think important to note that it's less than 10,000 that are in the fully funded category there, where they're in that kind of baseline pricing and packaging that effectively provides them with free Internet. And that's pricing more, I would call it, susceptible customer base, but we're already working with all of those customers in terms of what that transition will look like assuming that the program does go away.

Speaker 2

Yes, the majority of the customers were our customers before they signed up for ACP. So they used ACP to increase the tier of service that they received. And so again, we can go and look at what they're paying now and what their usage is now and make sure that we position them nicely into something that they can afford. And I'm going to have to get back with you Brandon. I don't think I know the ARPU of our selling for the Q4 off the top of my head.

Speaker 1

Well, we don't disclose that anyway.

Speaker 2

So there you go.

Speaker 6

Thanks for taking the questions.

Speaker 1

You're welcome.

Operator

There are no further questions at this time. Ms. Laulis, I turn the call back over to you.

Speaker 2

Thank you, Desiree. So before closing, I would like to again thank our associates for their insights, ideas and efforts, which make the difference in our pursuit of market share growth. Thank you everyone for your time and attention today. We appreciate your continued support and interest in Cable 1.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Cable One Q4 2023
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