Cable One Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 11 speakers on the call.

Operator

and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Cable One Second Quarter Earnings Call. All lines have been placed on mute to prevent any background remarks, there will be a question and answer session. I would now like to turn the conference over to Jordan Morkert, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, and welcome to Cable 1's Q2 2024 Earnings Call. We're glad to have you join us as we review our results. Before we proceed, I'd like to remind you that today's discussion contains forward looking statements relating to future events that involve risks and uncertainties, including statements regarding future customer growth, changes in ARPU, our recently announced organizational changes, the impact of the ending of the affordable connectivity program, capital expenditures, financial performance, capital allocation, dividend policy, leverage ratios and financing plans. You can find factors that could cause Cable 1'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. 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 Web site at ir.cableone.net. Joining me on today's call is our President and CEO, Julie Lawless and Todd Cucci, our CFO.

Speaker 1

With that, let me turn the call over to Julie.

Speaker 2

Thank you, Jordan, and good afternoon, everyone. We appreciate you joining us for today's call. In the Q2, we executed on our phased plan for long term growth by taking steps to drive penetration deeper across all market segments and strengthening our competitive position. Cabo is a durable enterprise and our adaptability has been key to our success. As part of our focus on growth, we have continued to upgrade our internal platforms to best in class standards, implemented organizational changes that enhance our competitiveness by empowering greater decision making at the local level, and continue to refine our go to market approach to meet evolving market conditions.

Speaker 2

Despite challenges such as the discontinuation of the affordable connectivity program and seasonal fluctuations typical of the second quarter, we maintained steady progress with both connects and disconnects improving on a year over year basis for the 2nd consecutive quarter. We remain focused on leveraging our strong presence in rural America to capture opportunities and deliver value to our stakeholders. And we believe our 2nd quarter results reflect execution against our strategic plan and set the stage for sustained long term growth. Before handing the call over to Todd for a detailed review of our financial performance, I'd like to address 3 key topics. First, I'll discuss broadband growth across our business.

Speaker 2

I'll touch on favorable trends we are seeing due to our new initiatives, including the unique challenges and dynamics of the current marketplace and provide insight into our expectations for the future. 2nd, I'll explain how proactive and capital efficient investments in our network over the past years enable us to provide a superior customer experience and position us for the next generation of speeds and service offerings necessary to deliver for our customers' expanding needs. Finally, I will outline the recent organizational changes we made to fuel our strategy for the future. These reconfigure the relationship between our local teams and corporate office, empowering decision making at the local level by associates closest to our customers. We believe this approach will enhance our agility and better support our growth initiatives.

Speaker 2

First, residential broadband. In the Q2, we faced the challenges presented by the ending of the affordable connectivity program. Through proactive and thoughtful communication, assessing our customers' financial and usage needs, and aligning them with suitable plans, we successfully managed a net decrease of about 4,000 customers of the approximately 48,000 customers receiving an ACP subsidy during the quarter. Please note, this figure does not take into account any estimate of the impact that the end of the ACP program had on our gross connections for the quarter. We also anticipate some additional churn from ACP in the Q3.

Speaker 2

Excluding the impact of those 4,000 lost ACP customers, our residential broadband customer base would have declined by only 200 customers on a sequential quarterly basis, a significant improvement compared to the seasonally impacted declines we experienced in the Q2 of 2023. Despite the loss of ACP subsidies, we experienced both improved connects and disconnects in Q2 on a year over year basis for the 2nd consecutive quarter. As I've discussed in prior quarters, our relatively low broadband penetration leaves us well positioned to drive incremental growth over time. By segmenting our marketplace, targeting each cohort and addressing their unique needs, we can access new market segments and increase penetration in existing ones. Furthermore, our ongoing digital transformation initiatives and significant excess network capacity enable us to deliver our services more efficiently with the marginal cost of each incremental customer lower than ever.

Speaker 2

In addition to the positive momentum in customer trends, our ARPU declined slowed sequentially as anticipated as our customers began to roll off of select promotions and we continued to refine our competitive responses. We also experienced strong demand for our premium speed tiers, with 45% of new customers opting for gig or higher speeds, up from 39% in the same quarter a year ago. This trend resulted in increased overall sell in ARPU this past quarter and set a favorable trajectory heading into the Q3. In July, we implemented a new program in which we increased rates for nearly half of our HST customers by $5 with an option to offset this increase through a $5 credit for customers who sign up for auto pay using a debit card or bank account and paperless billing. Our research indicates that encouraging auto pay enrollment can boost retention rates, providing an opportunity to further reduce our already low churn rates.

Speaker 2

Additionally, we anticipate this program will result in decreased billing and transaction processing costs. While our approach with this program remains conservative relative to industry standards, it reflects our ongoing commitment to improving operational efficiency. Driven by the aforementioned factors, including promotional roll offs, refinements to our competitive responses, increased selling rates and our auto pay program, we currently expect ARPU to stabilize in the second half of the year. One of the challenges we have faced is steadily increasing wired competition. We have successfully navigated this hurdle in the past by leveraging our deep local knowledge and delivering products and services that make our customers' lives easier.

Speaker 2

By actively listening to and acting on customer feedback, we effectively meet our customers' needs and stay ahead of our competitors. In many of our markets, factors such as high construction costs influenced by lower population density, challenging topography, and limited access to labor pools contribute to the difficulty of entering many of our communities. These factors, along with the current cost of capital, make these areas less attractive to OVA builders. For those contemplating entry into our markets, the ARPU and penetration rates required to yield viable returns in these higher cost locations make aggressive pricing strategies difficult to sustain. We believe these market dynamics, coupled with our multifaceted responses that extend beyond pricing alone have already prompted potential newcomers to reconsider their plans to enter some of our markets.

Speaker 2

Another key opportunity for long term growth is business broadband, which saw a 1.6% increase in year over year revenues from the same quarter last year, despite the economic and market headwinds affecting the small business sector. We also see strong demand in carrier, wholesale and enterprise customer segments. These markets are still emerging, but consistently growing for Cable 1. A recent notable success in our carrier services segment is a long term contract for a several 100 site opportunity with a total contract value exceeding $30,000,000 This achievement is a testament to our strong network, trusted brand and the exceptional support provided by our carrier sales team. I would now like to discuss why our network is also a significant growth enabler for us.

Speaker 2

We recognize that consumer demand for data consumption, reliability and performance is continually rising and our ongoing investments ensure we will exceed these expectations. We are well positioned to support multi gig speeds in nearly all markets as we transition our remaining video customers to our IPTV platform. Our balanced investment strategy includes a roadmap to achieve 5 10 gig speeds, including upgrade options such as DOCSIS 3.1 enhanced and DOCSIS 4.0 over the next several years. Our whole home Wi Fi product remains integral to enhancing in home performance and elevating the overall customer experience. Recognizing WiFi's pivotal role in shaping customer perceptions of their Internet service, we are continually investing in the state of the art products to enhance our offerings in the market.

Speaker 2

We are actively focused on the development of new products, services and partnerships aimed at elevating the customer experience and ensuring seamless connectivity. We operate our network at substantial capacity and low utilization levels that we believe significantly exceed those of our wireless competitors. Our HSD customer base, including those with video service, consumes approximately 700 gigabytes monthly per home on average, a data usage level far surpassing that of mobile fixed wireless networks. We anticipate this trend will accelerate with the increasing shift of sports content to streaming platforms and the introduction of new products that leverage our extensive capabilities. Moreover, our peak hour utilization remains below 20%, underscoring our commitment to ensuring our network is never a barrier to growth.

Speaker 2

Lastly, we have recently implemented significant organizational changes as part of our strategy to foster sustainable long term growth and adapt to evolving customer needs in today's competitive landscape. Central to these changes is our unwavering dedication to community based, reliable service bolstered by equipping our local system associates with essential tools and resources to meet these challenges. In our drive to enhance operational excellence, we have restructured the dynamics between our local and corporate teams, harnessing their respective strengths to better serve our customers. This involves expanding and realigning our regions around growth centers, driving decisions to the local level where teams can act with speed and agility in the best interest of customers and associates in their communities, providing those leaders with the resources necessary to deliver exceptional service and achieve region specific performance targets, and unifying and streamlining our distributed customer care resources under common leadership who will maintain our local presence and drive our neighborly approach. Since the reorganization was announced, we've actively engaged with our associates in the field to discuss the changes and gather their feedback.

Speaker 2

The enthusiasm has been palpable, reflecting their excitement about being empowered to drive growth in their markets. These organizational changes, coupled with growth initiatives and ongoing network investments, exemplify our commitment to rigorously evaluating every facet of our company to ensure we are continuing to make informed and strategic decisions that deliver superior long term value and service to our customers. And now, Todd will provide a recap of our 2nd quarter financial performance and further discuss our outlook for the future.

Speaker 3

Thanks, Julie. Beginning with the top line, our total revenues for the Q2 of 2024 were $394,500,000 compared to $424,000,000 in the Q2 of 2023. This decrease was primarily driven by lower ARPU in our residential data customer base and the continued attrition of low margin video subscribers. Residential data revenues for Q2 decreased by $16,400,000 or 6.7% year over year. The primary driver was a 6.9% decrease in ARPU attributed to the implementation of targeted pricing and product offerings in specific markets against select competitors, along with a focus on accretive value conscious customer cohorts, which tend to have lower selling rates.

Speaker 3

As Julie noted, based on a number of contributing factors, we anticipate that ARPU will stabilize in the latter half of the year. On the business data side, 2nd quarter revenues grew by $900,000 or 1.6% compared to the prior year. Business data PSUs grew by 500 subscribers sequentially and by more than 1700 over the past 12 months. Operating expenses were $105,800,000 or 26.8 percent of revenues in the Q2 of 2024 compared to $112,800,000 or 26.6 percent of revenues in the prior year quarter. The decrease in expense was driven largely by an $8,500,000 decrease in programming costs as well as our ongoing focus on optimizing cost structures within our labor base.

Speaker 3

Selling, general and administrative expenses were $90,800,000 or 23 percent of revenues in the Q2 of 2024 compared to $86,200,000 20.3 percent in the Q2 of last year. The increase was driven by $5,500,000 of non recurring severance costs associated with the previously mentioned form changes as well as $1,200,000 of costs associated with our continued investment in our long term transformative operating platforms that we've previously discussed. As we outlined in our 8 ks that was furnished in conjunction with our recently announced reorganization, we anticipate approximately $14,000,000 of annualized run rate savings related to these changes that will begin in the Q3. Bottom line net income was $47,600,000 for the Q2 of 2024 compared to $55,200,000 in the Q2 of 2023. Adjusted EBITDA was $212,400,000 or 53.8 percent of revenues in Q2 2024 compared to $231,300,000 or 54.5 percent of revenues in the prior year quarter as we continue to implement our plan to achieve sustainable unit growth within our data segments, albeit with the intended rebalancing of certain pricing strategies that impacted revenue per unit on a short term basis.

Speaker 3

Our EBITDA margins slightly improved on a sequential basis. Capital expenditures were $71,600,000 in Q2 of this year compared to $81,500,000 last year, equating to a $9,900,000 or 12.2 percent decrease year over year. Sequentially, our total capital investment increased by $5,700,000 primarily due to our ongoing investment in leading whole home WiFi technology and line extensions. We expect that total CapEx for the year to be in the $300,000,000 area. Adjusted EBITDA less capital expenditures was $140,800,000 in the Q2 of 2024, a $9,000,000 or 6 percent decrease from the prior year.

Speaker 3

Year to date, our adjusted EBITDA less CapEx was $291,900,000 a 3.4% increase from the comparable prior year period. We continue to maintain our disciplined and conservative capital allocation strategy. Our focus remains on 4 key areas: 1, investing in our network to ensure we are able to offer premium Internet service in the markets we serve 2, pursuing organic growth investments with attractive economic returns, highlighted by the 34,000 new passings we've built so far this year 3, exploring inorganic investments to consolidate complementary rural broadband assets or partner with proven operating leaders for strategic growth opportunities. And 4, returning capital to shareholders through regular dividends, disciplined debt reduction and opportunistic share repurchases. During the quarter, we invested an additional $20,000,000 in NextLink Internet, extending our strong partnership with this leading rural broadband provider.

Speaker 3

Our investment comes alongside an incremental investment from the company's founder and CEO and will continue to support NextLink's compelling profitable growth trajectory and expanded fiber footprint through the Central and South Central U. S. We continue to see strong long term value creation opportunities via our existing investments in these rural broadband franchises alongside these proven owner operators and trusted third party financial partners. In Q2, we distributed $17,100,000 in dividends to shareholders and repaid $54,600,000 of debt, including a $50,000,000 volunteer revolving credit facility pay down. Our capitalization and balance sheet management philosophy is rooted in a conservative mindset and one that is committed to disciplined debt repayment and demonstrated ability to deleverage, specifically subsequent to material strategic events.

Speaker 3

Since early 2023, we have repaid over $327,000,000 of debt, including $300,000,000 of the initial $488,000,000 drawn under our revolving credit facility. As of the end of the second quarter, we had approximately $202,000,000 of cash and cash equivalents on hand, and our debt balance was approximately $3,600,000,000 consisting of approximately $1,800,000,000 in term loans, dollars 920,000,000 in convertible notes, dollars 650,000,000 in unsecured notes, dollars 238,000,000 of revolver borrowings and $5,000,000 of finance lease liabilities. We also had $762,000,000 available for additional borrowing under our $1,000,000,000 committed revolving credit facility as of the end of the second quarter. Our weighted average cost of debt for Q2 of 2024 was 4.2% with over 75% of our borrowings either fixed issuance or synthetically fixed at underlying base rates that are approximately half of the prevailing floating rates. Our net leverage ratio on a last quarter annualized basis was just below 4x, while our secured net leverage ratio was approximately 2x.

Speaker 3

Turning to MBI. Our call option to acquire the remaining 55% of the company that we do not already own expired unexercised on June 30. If the put option held by the other MBI owners is exercised during the open window in Q3 of 2025, we would expect the transaction to close around late 2025 or early 2026 subject to customary closing conditions and regulatory approvals. We believe that if the put option is exercised, our existing cash balances, anticipated available capacity under and our operating cash flows would be sufficient to fund the purchase price without raising additional incremental capital. However, as previously mentioned, we will continue to opportunistically assess capital market conditions with a focus on ensuring we maintain meaningful excess liquidity, a long term maturity profile and access to diversified sources of capital.

Speaker 3

Before we hand it off for questions, I'd like to emphasize that we are executing effectively on our phased plan for long term growth. Our robust network and dedicated associates are central to this effort as we remain fully focused on leveraging our unique resources to deliver a seamless connectivity experience to a growing number of customers across our footprint. We are making progress and we are just getting started. Our commitment to all stakeholders is steadfast. We are always working for you.

Speaker 3

With that, we are now ready for questions.

Operator

Our first question will come from the line of Greg Williams with TD Cowen. Please go ahead.

Speaker 4

Great. Thanks for taking my questions. You guys had some helpful color on calling the trough of ARPU. Wondering if you can kind of do the same for EBITDA. You had a lot of investments in billing automation platforms, but then of course you had the 5% price hikes and you mentioned the 4% organizational headcount reduction.

Speaker 4

And so are we at trough EBITDA on dollar on margin levels from here at $212,000,000 Or just any color from the trajectory would be helpful. And then second question is just on maybe a

Speaker 1

little more color on ACP. You said 4,000 subscribers left, but there's 4,800

Speaker 4

that were taking ACP subsidies because I thought you

Speaker 1

had 10,000 ACP subscribers.

Speaker 4

I'm just trying to reconcile that. So does that mean there's only 800 paying left in the 3rd quarter? If you give us some help on the Q3 clarity, that'd be great. Thanks.

Speaker 3

The question on EBITDA and ARPU trough comment that you reiterated and then I'll let Julie hit on some of the ACP stuff. As it relates to that ARPU stabilization, we've talked about this as it's specific to some of the initiatives that we started late last year, both with some of the tactical responses as well as some of the more value conscious selling rates or selling rates for more value conscious customer, we better said. And we do feel like some of the initiatives that we took had the outcomes that we expected. And then now many of the initiatives that we're putting in place now, like we referred to on the call, we'll provide that stabilization factor. You saw that EBITDA margins were very consistent sequentially in the quarter, slightly up, but basically by 10 basis points.

Speaker 3

And when you start to think about ARPU stabilizing and you have a stable to growing base of units, and that's your highest margin product outside of some of the cost things that we're going to continue to invest in as you said in these long term platforms. You can allude to where we also feel like profitability can expand from here.

Speaker 2

And jumping in on ACP, so 4,000 ACP customers lost in the second quarter out of the 48,000 total ACP customers. So at this point in time, through the Q2, 91% of the ACP customers are being retained. But hey, we're in unprecedented times, right? We have essentially been through all of our billing cycles given that we did not give a partial subsidy in May. But we understand that customers will be adjusting to ongoing billing amounts and that future non pay churn is possible.

Speaker 2

I also will call out that we have a small segment of ACV customers who have a loyalty credit that will roll off in the 3rd quarter, which could be a catalyst for churn. But as usual, we're communicating with these customers and we're talking to them about options that meet their needs. So that is more color on ACP.

Speaker 4

Got it. Thank you.

Operator

Our next question will come from the line of Sebastiano Pettit with JPMorgan. Please go ahead.

Speaker 5

Hi, thank you. Just a quick clarification and follow-up on the ARPU stabilization. Are we should we be thinking about that as you exit the year, so 3Q into 4Q sequentially ARPU begins to stabilize or should we maybe or should we be thinking about it on a year on year decline basis? And then subsequently and then additionally, in regards to the price increase, any color perhaps around the level of where the percentage of your base currently on autopay and how we should think about the price increase impacting back half trends and trying to perhaps size the impact or benefit there? Thank you.

Speaker 2

Yes. Maybe I'll jump in on the adjustment. It's I don't really think of it as a price increase because clearly customers can completely negate it. I think we specified that half of our current HSD customers received this. The folks that didn't, would either be currently enrolled in such a program or potentially a promo customer or different family of brands that have yet to be integrated into our billing database.

Speaker 3

And Sebastiano, when you think about that, while we're going to be tracking that very closely, it's $5 if somebody does not elect to do that auto pay, right. So you can assume a population will not, but it's been approximately half that that we make up in expenses if they do relative to fees and other charges. And we've seen data and I think others have spoken to this in the past, but we've seen data that on auto pay, you even improve on the retention side of the equation. So, if you're half of that number and just absolute cost and you're improving retention, we feel that you win on either side of that equation. As it relates to the ARPU question, that's a sequential assumption, if you will, relative to where we are in the kind of high 70s right now.

Speaker 3

And with the initiatives that we put in place that we've been talking about some of the selling ARPU lifts, some of the discount roll offs, some of the competitive dynamics and the tactical strategies that we'll continue to evaluate, but the vast majority of them that were employed in late 'twenty three and early 'twenty four, the stabilization comment is related to sequential ARPU.

Speaker 5

And then if I could ask a quick follow-up. On the broadband subscribers, I think maybe last quarter or perhaps Q4, but I think you had talked about the year on year improvement in net adds kind of continuing to accelerate as you kind of you're blocking and tackling or your go to market strategy was tweaked a little bit in order to kind of towards initiatives that would accelerate subscriber growth. Is the expectation at this point that you can that, that can continue, that the pace of change or the pace of improvements in underlying broadband subscriber growth can continue while ARPU stabilizes? Thank you.

Speaker 2

I'll jump in there and talk. Feel free to tag along. Yes, I mean, I think when you look at the Q2 as sort of the, an example, despite the headwinds from the expiration of ACP, we still had a quarter that was dramatically better than last year, same period. And our connects have been improving on a year over year basis. This is the Q3 that that's happened, and our churn is also at all time lows.

Speaker 2

So I think we are learning, we are calibrating, we are leveraging. We are taking those learnings and putting them to use. So our focus is absolutely, as we've talked about in the past, on a phased growth plan and the first phase of that is really driving growth, unit growth specifically.

Speaker 5

Thank you.

Speaker 2

And are a part of that obviously.

Operator

Our next question will come from the line of Frank Wildman with Raymond James. Please go ahead.

Speaker 6

Okay, great. And just to back on the ARPU question, should we think of Q2 as sort of the low and it kind of bottoming from there? Or will it be more maybe drift down a little bit and then maybe grow in the back half of 25, something like that. And then when you say you're targeting certain customers, you know, how how much longer can you do that? And I don't know, when you talk about these customers, are these some of the bigger customers, national players or more some of the smaller regional ankle biters?

Speaker 3

Frank, I'll kick off. I would say again on the ARPU side, it's a stabilization factor sequentially, Getting into light sense on that relative to up or down is not the guidance we're going to give. But I think with some of the initiatives that we have in place, the stability and growing customer base that we have, sans ACP, we feel very confident in that, not only just through the balance of the year, but even as we're into the next quarter. And then on the customer side, from a competitive perspective, as we mentioned in the past, the tactical strategies were very specific to certain competitors that in most cases were new, in most cases, not in most cases, in all cases, we knew where capital access was, cost of capital, go to market strategies and we are able to employ specific strategies against those. So I won't put them into a specific defined category that you use, but you can probably take away from that the types of specific competitors that we are focused on there.

Speaker 2

And just to follow on, the, the oh, never mind.

Speaker 7

Yep. Go ahead.

Speaker 2

I was going to say to give an example where when we go up against small overbuilders with these targeted offers, we have seen wins in that there may have been press releases about other markets that they were going into that have been quietly taken down. And so that is the sort of result that we are seeing from those targeted efforts.

Speaker 7

Got it. Okay. Thank you.

Operator

Our next question will come from the line of Steven Cahall with Wells Fargo. Please go ahead.

Speaker 8

Hi, this is Dan on for Steve. Unfortunately, I'm going to beat a dead horse here, but back on broadband ARPU. The stabilization commentary is helpful, but looking back historically, you've grown ARPU in the mid single digit range. So would you expect to return to these levels of broadband ARPU growth over time? Or should we expect a more persistent level of promotion and targeted pricing actions moving forward?

Speaker 2

I don't well, we're not going to give specific guidance, but I think the idea of growing in a mid single digit range over the long term is something that we'd be looking forward to. But we are in a phased growth plan at this point in time. So that starts with stabilization. So again, as part of a long term plan, sure. Right now, stabilization.

Speaker 3

And Dan, I'll just add on that. I'll just add on that, Dan, it's Todd. You continue to see more and more discipline in the market across all operators. I mean, there's still a select view that you scratch your head at from time to time. But as it relates to pricing discipline, return on invested capital for these highly complex, extremely costly to build, especially in these rural markets, costly to operate networks.

Speaker 3

And we believe, as Julie alluded to in her remarks, that that will continue to be a discipline that's required as it relates to long term returns for invested capital, whether that be public capital or private capital.

Speaker 2

Got it. Right.

Speaker 9

And maybe Right.

Speaker 2

And maybe demand for connectivity, both speed and data and you realize that there are lots of opportunities for monetization in the future.

Speaker 8

That's helpful. And maybe just as a quick follow-up, could you update us with where your fiber overlap sits today?

Speaker 2

Yes. We currently are sitting at 42% of our markets overbuilt with fiber.

Speaker 10

Thank you.

Operator

Our next question will come from the line of Kewalen Parramoguru with BNP Paribas. Please go ahead.

Speaker 7

Hi, thanks for the opportunity. First question is on ACP. Can you just try and quantify for us how much of the impact this quarter was from churn and how much was from gross adds declining in the market? And secondly, we noticed you have added a new risk factor related to MBI in the filing. I know you've been reluctant in the past, but please can you try and give us a little bit more color around the potential size of the outlay here or multiple for this business given it's so material for shareholders?

Speaker 7

Thank you.

Speaker 2

I'll start on the ACP question. We noted in our comments that the $4,000 loss during the Q2 of the 48,000 total ACP customers was on the disconnect side. We did not quantify the connect side. But given that, we stopped selling ACP in the Q1 and our connects are still up. And actually about a third of our connects in the second quarter came from what I would call our value segment, which I would assume is very similar to ACP customers.

Speaker 2

And the majority of those folks took, 300 meg services or higher. So, we did not quantify the connect side, but rather the disconnect side.

Speaker 3

And then on the MDI side, I will reiterate a few things I've said over the last couple of quarters as it relates to, an event that, 1, an event that, we expect to occur if nothing else changes according to the agreement we have in late 'twenty five, early 'twenty six. We did outline in our prepared remarks that the call option has expired as of this quarter on exercise. That put option is in Q3 of 2025. We've been actively planning for that. Our commentary has been very centered around our confidence and the ability to affect that transaction without even the need to go to the capital markets.

Speaker 3

Yet we will remain very opportunistic in looking at capital markets. We have a very diversified access strategy and a very proactive long term strategy to ensure we have excess liquidity, long term maturities, cost efficient capital and we're actively evaluating those. But that's something that we feel very comfortable can be executed within our historical operating leverage of 2.5x to 4.5x. Is it going to be towards the higher end of that range, acknowledging that, but well within that higher end, if that's helpful.

Speaker 7

That's helpful. Thank you.

Operator

Our next question will come from the line of Craig Moffett with MoffettNathanson. Please go ahead.

Speaker 9

Hi, thank you. Two questions if I could. First, I know I've asked this question in the past, but I thought just given how much convergence is on everyone's lips, I'm wondering if you are thinking at all about how you might add wireless to your consumer offering and whether there's anything to discuss on that front? And then second, do you think that your competitors who are building fiber in your footprints are making money? Todd, I think I know you well enough to know you probably have a pretty good guess about what they're spending in cost per home passed.

Speaker 9

Is it your sense that they are still overbuilding at a positive return on capital?

Speaker 3

I'll start with the latter and then I'll let Julie speak to some of the convergence. Craig, thanks for the question. And yes, we have spoken a lot about that. I would say, I think it's important to note that while Julie alluded, we have 42% overlap from fiber and that's both with incumbent fiber as well as new entry overbuild fiber. That pace has continued to increase in spite of that our DISCOs and our connects as Julie was outlining on the call are at really healthy improvement levels.

Speaker 3

On the DISCO side, It's actually for Q2, a low for the last 6 years, if you take out the pandemic years, of course. And we think that that's actually a great testimonial to how we're performing against even this increased competition. As it relates to the economics, what's been built today was probably where they're going to get more disciplined economics and where maybe in many cases you had access to lower cost of capital over the last 3 years. We know the cost of capital has changed. We know the access to capital has changed, with the exception of maybe a few of the larger scaled players.

Speaker 3

And we do expect that when you start to get into cost per home and then the overall labor cost to operate, which I think so many people fail to think about as it relates to how do you operate a highly rural, low density in a efficient operating cost structure that the areas that have not yet been built will probably be built over a slower pace over time because of the economic dynamics we talk about.

Speaker 2

And jumping in on convergence, it's interesting to watch today to see where wireless companies are either building or buying wired providers, I think that suggests something interesting to us all. And I think we continue to muse over the utility of a wireless and wired bundle, either to the customer or to the companies that are providing them, for the long term. That being said, the MVNO possibility is something that we look at and model and remodel multiple times a year to check and see. It needs to be, economically viable and compelling to both us and our customers over the long term to jump into that. And we think that there are that is just one of the products and capabilities and partnerships that will serve customers and be monetized by companies like ours over the long term.

Speaker 2

If we do decide to jump into the wireless world, I think we have options available to us that get us off to a relatively quick start. So time will tell, Craig.

Speaker 9

All right. Thank you.

Operator

Our next question will come from the line of Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Speaker 10

Great. Hey, guys. Thanks for taking the questions. Hoping you could help us understand your expectations for broadband to travel growth in the second half of the year. Maybe some comments in terms of July.

Speaker 10

Julie, are you guys positive in July? And then just bigger picture, when will we start to see penetration go up? Obviously, that's the goal of this program in terms of change in strategy. So hoping you could help there. Thanks.

Speaker 2

Yes. Well, I would point us all back to our focus on growth on a phased long term growth plan on increasing penetrations across all customer segments. That is what we are focused on. And remind you that, again, despite the headwinds that we experienced with ACP expiring, we are making steady progress on that. I don't think you're hearing about connects being up over year over year over 3 quarters or customer growth like you are hearing from us because of our focus and the fact that these initiatives are gaining momentum, disconnects being down as well.

Speaker 2

But not going to give specific guidance about what sub growth will look like in the second half. Only that is what we are focused on. And as Todd said at the end of his comments, we're always working for you. That is our branding tagline. And I think that the reorganization that we've recently accomplished is part of making sure that that focus comes to life in a very bespoke way in each one of our markets.

Speaker 10

Got it. Thanks, Susan.

Speaker 3

And Brandon, I'll just jump in, Brandon, if you're okay. As it relates to what is, I think, a really compelling incremental opportunity for us, you've seen our passings increase. We talked about in the prepared remarks of about 35,000 year to date. On an LTM basis, that's over 75,000 homes. A meaningful amount of those are in our existing markets.

Speaker 3

And these are in our existing markets where we see really strong well, really strong maybe be a little bit of a stronger term, but stronger than what we've seen in the last couple of years developments from economic stimulus, economic growth, new builds, new housing permits, Texas, Northern Arizona, South Carolina, Idaho. These are some areas yet still very rural markets that are seeing some really strong growth areas and we can capitalize on those. And these are capitalizing on them in markets we've been in for years with a very strong brand with highly upgraded networks. And so that's the best return on invested capital we can allocate towards and then we can capitalize from a growth perspective. But as we all know, when you build those, you're not just a connection a day away, right?

Speaker 3

So that lags a little bit. But as Julie was said, with our reorg and the changes that we've made there, we're really powering that growth through that local approach and those local leaders.

Speaker 10

Got it. Thank you. And if I could just follow-up, just so that we are all perfectly clear, you guys said stabilization in ARPU in second half. That implies that there could still be sequential declines in ARPU or it could be sequentially positive in 3Q, 4Q?

Speaker 2

I don't think I can expand on comment.

Speaker 10

All right. I tried.

Speaker 3

I think the initiatives we put in place gives us confidence in that stabilization factor and sequentially that should be seen in Q3.

Speaker 10

Thanks Todd. Thanks Julie.

Speaker 2

You got it Brandon.

Operator

I will now turn the call back to Julie Lawless for closing remarks.

Speaker 2

Thank you, Regina. So before we conclude, I want to extend my gratitude to our associates. Their energy, dedication and ability to navigate this ever changing environment has never been more evident. I am incredibly proud of and thankful for each and every one of them. Thanks and we look forward to speaking to you again next quarter.

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Earnings Conference Call
Cable One Q2 2024
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