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Analysts debate meaning of Cable One's slowed broadband sub growth

Although investors like the high margins of Cable One Inc.'s residential broadband service, the cable operator's tepid subscriber growth at the end of 2017 has some analysts wondering whether those margins have gotten too high for consumers.

Cable One — a top 10 cable operator in the U.S. with roughly 800,000 customers across 21 states — is perhaps best known for its 2012 decision to prioritize its residential high-speed data and business services over its pay TV video product. While that choice had led to greater free cash flow at the company, it has also sharpened analysts' focus on Cable One's broadband subscriber numbers.

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For the fourth quarter of 2017, Cable One ended the period with 584,854 residential high-speed data connections, including 476,046 legacy Cable One connections and 108,808 connections from the company's May 2017 acquisition of NewWave Communications. By comparison, the company ended 2016 with 469,053 legacy broadband connections, meaning that Cable One saw organic year-over-year growth of just 1.5%.

At the same time, Cable One's average monthly revenue per unit for its residential broadband service came in at $63.92 for the fourth quarter of 2017, including ARPU of $67.14 for subscribers in Cable One legacy markets and ARPU of $49.95 in the acquired NewWave markets. For 2016, ARPU for legacy Cable One was $62.64, meaning that the company saw a 7.2% year-over-year increase in its legacy markets.

SunTrust Robinson Humphrey analyst Greg Miller labeled Cable One's fourth-quarter 2017 results as "mixed."

"Revenue came in above our and consensus estimates, driven by strong HSD ARPU, while HSD subscriber net adds came in below expectations," Miller said in a research report.

But for MoffettNathanson analyst Craig Moffett, Cable One's results are much more troubling and potentially signify a larger problem.

"Cable One's legacy residential broadband growth rate stands at just 1.5% YoY, a shockingly low number," Moffett said. "They face the most limited broadband competition of any publicly traded operator, and they have the lowest starting penetration. Should they not be growing broadband the fastest of anyone?"

According to Cable One CEO Julia Laulis, the company faces wired broadband competition in about 27% of its total footprint. Speaking during a March 6 investor conference, Laulis said: "We have competition everywhere, but it's not hypercompetitive by any stretch of imagination. It's favorable competition."

For Moffett, the fact that Cable One recorded organic residential broadband subscriber growth of 1.5% at the end of 2017 could be a sign Cable One's broadband prices have gotten too high.

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"Cable One's legacy residential broadband ARPUs are significantly higher than that of Comcast [Corp.] or Charter [Communications Inc.]'s, despite Cable One's footprint having lower average incomes than their peers," Moffett said.

Neither Comcast nor Charter break out their residential broadband ARPU. But based on Comcast's residential broadband revenues of $14.77 billion in 2017 and its 23.9 million residential broadband customers, Comcast's monthly residential broadband ARPU was roughly $51.58. For Charter, which ended 2017 with residential broadband revenues of $14.11 billion and 22.5 million residential broadband connections, the company's monthly residential broadband ARPU was roughly $52.14.

Of course, this is not an apples-to-apples comparison because Comcast and Charter both rely heavily on double- and triple-play packages, which have the effect of discounting broadband ARPU. Cable One, by contrast, has moved away from the triple play as it has de-emphasized its video product.

According to Laulis, Cable One's higher residential broadband ARPU and lower customer growth in fourth quarter 2017 are both results of Cable One's strategy to move away from year-round discounts on the company's 100 Mbps internet offering.

"In the short term, with no promos, with nothing being on sale, you get the slowdown in units and the rise in ARPUs. But in the long term, we envision growth in balance," she said during a March 1 earnings conference call.

SunTrust's Miller said he also expects Cable One to "see a near-term headwind to HSD net adds" as the company "stops providing steep discounts," but the operator is projected "to increase penetration at higher ARPUs, driving margin expansion."

Laulis said Cable One is working to "dimensionalize" the value of its broadband product in customers' minds by touting its whole-home WiFi ONE product, which works to eliminate dead zones, and other customer service conveniences.

"We're doing that to set the stage so that we can test sales tactics, sales offers and pricing," Laulis said, adding that while the company's strategy requires a bit of patience, she is "comfortable where our HSD product and pricing is headed."

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