WOW - NYSE

Good morning. My name is Rex and I will be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest Q2 2022 Earnings Call. [Operator Instructions] At this time, I’d like to introduce Andrew Posen, Vice President and Head of Investor Relations. You may begin your conference.

Good morning, everyone and thank you for joining us for our second quarter 2022 earnings call. With me today is Teresa Elder, WOW’s Chief Executive Officer and John Rego, WOW’s Chief Financial Officer. Before we get started, I would like to remind everyone that during our call, we will make some forward-looking statements about our expected operating results, our business strategy and other matters relating to our business. These forward-looking statements are made in reliance on the Safe Harbor provisions of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward-looking statements. You are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update such forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially from our forward-looking statements, please refer to our filings with the SEC, including the Risk Factors section of our Form 10-K filed with the SEC as well as the forward-looking statements section of our press release. In addition, please note that on today’s call, and in the press release we issued this morning, we may refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial metrics provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our historical results can be found in our earnings releases and our trending schedules, which can be found on our website. We have also included a presentation this morning to complement our prepared remarks. Now, I will turn the call over to WOW’s Chief Executive Officer, Teresa Elder.

Thanks, Andrew. Welcome to WOW’s second quarter earnings call. I am pleased with the results we reported this morning. And I am really excited about the progress we consistently make as we execute our long range plan as a high growth low leverage business. We continue to grow our base with the addition of new HSD subscribers, which exceeded our expectations for the quarter and drove record pro forma adjusted EBITDA and EBITDA margins. Naturally, we have to balance our optimism for the future with the challenges of the current economic environment. However, despite these challenges, which we believe are, short term in nature, our outlook for next year and beyond remains positive. For the second quarter, our high-speed data revenue increased 4% on a pro forma basis, while Video and Telephony revenue declined 14% and 12% respectively from the same period last year. Our pro forma adjusted EBITDA increased nearly 10% to a record $70.6 million, driven largely by the growth in our high margin high-speed data business. The pro forma adjusted EBITDA margin was also a record 40.1% for the quarter. Not only are we executing our strategy and growing our business, but our employees recognized WOW as a Great Place to Work. Once again, we have been named one of the best and brightest companies to work for in Atlanta, Detroit, and Denver and Workforce Research Group and Florida trends have named us one of the best companies to work for in Florida. Our employees are one of our main differentiators that enable us to provide exceptional customer service. In recognition of WOW’s efforts to continuously innovate to meet the needs of our customers and to close the digital divide, we were recently honored by Cablefax with the 2022 Independent Digital Equity award. All of these achievements highlight a successful first half of 2022 and underscored the strength and future prospects of our broadband first growth strategy. During the second quarter, we added 2,200 high-speed data RGUs, bringing our total to more than 517,000. With consistent levels of low churn, we once again increased the number of subscribers both year-over-year and sequentially and in the quarter with 537,000. The success of our focus on adding HSD-only customers is demonstrated by a selling rate around 87% for the eighth consecutive quarter. Consistent with the past several quarters, a majority of new customers are buying speeds over 500 meg and 85% of new customers are buying speeds over 200 meg. HSD ARPU of $66.30 is up sequentially, and year-over-year, predominantly reflecting customers purchasing higher data speeds and a slight rate increase that took effect in March. Our Edge-Out strategy continues to drive growth especially in our 2021 Vintage with penetration increasing to 40%. Our 2022 Vintage is off to a great start with penetration jumping to over 14% within the first 100 days and our 2020 Vintage remaining constant at 23.5%. As we said before, we believe the performance from our Edge-Out investments supports our confidence in our ability to grow quickly in our Greenfield markets. And with regard to Greenfield expansion, we officially started construction in Central Florida and are also preparing to put shovels in the ground in Greenville County, South Carolina. These initiatives are progressing well. And we are able to fund them, using cash from operations without having to increase our leverage. Another key factor in this effort is that we have secured the necessary materials and labor, which gives us confidence in our time line. We’re also making substantial progress on our mobile initiative and recently announced that WOW! Mobile powered by reach is now offered across our entire footprint. And in this tightening economic environment, we are so pleased to add this product to our portfolio, keeping customers connected at a price that fits their budget on a reliable, no contract cell phone plan with unlimited talk and text. We believe this additional offering will further enhance customer acquisition and retention while providing a great service that our customers expect and value. Not only are we making progress on these strategic growth initiatives. But we have also enhanced our core business with new initiatives to our infrastructure including the introduction of our 1.2 gig speed tier with 50 meg upload. For our commercial customers, we’ve launched our live agent chat option and WOW business continuity service, which ensures our small and medium-sized business customers always have access to an Internet connection. To conclude, I am so pleased with our second quarter results, which included record pro forma adjusted EBITDA and EBITDA margin. Our team is extremely focused on executing our growth strategy with continued momentum in our current footprint. The growth of our HSD subscriber base, higher penetration rates in our Edge-Out markets and progressed on our Greenfield expansion demonstrates that the pillars of our business are strong. Now, I’ll turn the call over to John, who will go over our financial results in more detail.

Thanks, Teresa. The second quarter delivered solid results despite increased volatility in the macroeconomic environment. We continue to execute on our broadband-first strategy and attract the opportunities ahead. In the second quarter, total revenue declined 3.2% to $176.1 million, reflecting a 4% decrease in high-speed data revenue, offset by declines in video and telephony, which decreased 13.7% and 11.6%, respectively. The growth in HSD revenue was predominantly driven by existing customers buying higher speed tiers and a marginal rate increase on our HSD service, which took effect in March for a portion of our subscriber base. These results were softer than expected, primarily due to promotional initiatives, which helped to drive subscriber growth. Pro forma adjusted EBITDA grew 9.8% from the same period last year to a record $70.6 million, driving pro forma adjusted EBITDA margin above 40%, also the highest that we’ve reported on a pro forma basis. We are now very close to the adjusted EBITDA margin that we reported prior to divesting the five service areas last year. On the next slide, we see the incremental contribution margin growth sequentially and year-over-year to 74.8% as the proportion of our high-speed data revenue, which is now 58% of total revenue continues to climb. I’d like to reiterate the importance of this metric as it represents a strong leading indicator for adjusted EBITDA and free cash flow generation. Now for a progress update on our cost structure alignment following the divestiture of the five service areas. As of the second quarter, we cut an additional $200,000 of costs, bringing our trailing 12-month savings to $16.1 million. This represents approximately 45% of the $35 million we identified for reduction over the next few years. We ended the quarter with total cash of $49.9 million and total outstanding debt of $749 million, holding our pro forma leverage ratio at 2.6x. In the second quarter, our CapEx from continuing operations decreased by $6.8 million from the same period last year to $34.7 million. This improvement is largely due to decreased spend on service enhancements and network support, partially offset by investments made in expansion CapEx. Greenfield construction began to ramp up during the quarter, contributing $4.5 million of additional spend. Looking at the right side of the slide, our second quarter results for unlevered adjusted free cash flow, which we define as pro forma adjusted EBITDA less CapEx, increased to $35.9 million, up $13.1 million from the same period last year, enabling us to fund our greenfield investments. Finally, before we open up the call for questions, I’d like to talk about our outlook for the third quarter and beyond. With full recognition of the broader economic headwinds we expect to face, we are revising our outlook for the year for HSD and total revenue but maintaining our guidance for adjusted EBITDA. We believe these challenges are short-term in nature. And as a result, we are maintaining our long-term targets. For the third quarter, we expect HSD revenue to be between $102 million and $106 million, total revenue to be between $171 million and $175 million and adjusted EBITDA to be between $66 million and $69 million. We expect HSD net additions to be between 1,000 and 3,000. For the full year, HSD revenue was expected to be between $415 million and $419 million, total revenue to be between $704 million and $708 million and pro forma adjusted EBITDA to be between $281 million and $284 million. We expect HSD net adds to be between 12,000 and 15,000. In closing, this was another solid quarter for WOW. We’re thrilled about the growth ahead as we continue to make good progress in executing our broadband-first strategy. And now we’d like to open up the line for some questions.

[Operator Instructions] Your first question comes from the line of Frank Louthan. Your line is open.

Great. Thank you very much. Can you give us a little bit more update on sort of the timing and status of the builds that you’re working on now? Are you still progressing on schedule, that as first. And then secondly, give us an update on the take rate with the wireless product that you’ve been reselling and what sort of the reaction is for customers? Thanks.

Thanks, Frank. Greenfield is doing very well. We’re extremely pleased with the progress that we’re making so far. We’re under construction and rolling in our Florida markets. And right about to start construction as well in the Greenville County, South Carolina markets as well. So we’re feeling very good about everything that we’re seeing there. And as we mentioned, we’re really thrilled with the kinds of penetrations we’re seeing from the targeting of the most recent Vintages of edge-outs. And we think that’s a great predictor of the future with edge-outs, with greenfield as well. In terms of mobile, we’ve just launched that within the last couple of weeks, enterprise-wide. And some customers are starting to avail themselves of that service. We view it as a nice add-on should customers want to get a discount and bugle for both. But I would say it’s one of our most core offerings as it is with some of our competitors. It is definitely an opportunity for customers so to get a discounted bundle with broadband and mobile from WOW. And so we’re just kind of starting with toe in the water there, but so far, so good.

Alright. Great. Thank you very much.

Your next question comes from the line of Brandon Nispel. Your line is open.

Thanks for taking the questions. Could you maybe unpack the HSD revenue and ARPU this quarter? You guys had guided to $104 million to $107 million versus what it came in, in terms of the HSD revenue at $102.3 million. So hoping to understand better what the driver is for that? And then in terms of the guidance for the year, HSD revenue decreased by, I think, $11.5 billion at the midpoint. Total revenue guide was down $3.5 million. So where are you picking up some more revenue? Thanks.

Thanks, Brandon. So we’re really pleased to see that HSD revenue is up 4%. And what I like about that is that it is really customers taking the higher speeds from us. I’m thrilled that so many customers are buying 500 meg and above. And then the very recently introduced 1.2 gig product has been taking off. It has not only the high speeds on the download, but 50 meg upload, which is very strong. So that is increasing ARPU as well as, I think, customer satisfaction. I’m pretty excited about that product. So those are some things that are helping us feel good about the continued growth in our ARPU and HSD revenue. But yes, we did recognize the current economic environment and adjusted guidance. John?

Yes. And I think Brandon, I mean, the reality of the situation is we’ve been doing a lot more promotional activity perhaps than normal. And that’s just to be able to put the subs on, which clearly versus our competitors, we seem to be one of the only which is being able to do that. So that takes a drag on earnings. But those types of promotional activities, they roll off after a quarter or so. So I think we’re setting ourselves up. So that’s the challenge right now. And the environment is really tough out there. But we’ve been able to find a balance where we can still grow EBITDA, still grow revenue, maybe not as much as before and with some promotional activity to keep growing the sub base, which will help us in the future. Our real story, by the way, starts in 2023 when we start selling into the greenfield market. So this is sort of a transition year.

If I could just follow-up with that relative to the midpoint of your guidance for this quarter, would you say that there was $3 million of incremental promotions relative to your expectations this quarter? And then Teresa, on your selling commentary, can you provide some stats on where the 500 megabit or 1.2 gigabit product sell-in in this quarter? Thanks.

Yes. So I don’t know if you want to talk about the midpoint, but yes.

It’s all promotional activity. But we just out there trying to get these sold. On the other side of the house, I mean, we have probably still one of the lowest churn profiles in the industry, and that’s holding up rather nicely. But going on and getting these subs right now is taking a bit of – and sorry, I break, Brandon, on the EBITDA side I mean we’re very efficiently managing our P&L. So we’ve got a lot of cost-cutting activity going on, partially due to getting to the $35 million we identified at Analyst Day plus everything else we normally do. So it’s a business, we’re managing the business right now.

Yes. And I think to your point about the promotions, one of the things that I think we’re really pleased about is our ability to do promotions is very targeted and strategic so that we’re always continuing to be the value provider in the market. But we’re not leaving money on the table either. I think multiple times on previous earnings calls; we’ve talked about some of the work we’ve done on the billing system and the conversion of systems. We’ve really simplified the complexity of our systems that has given us increased speed and agility. And that certainly is helping us in these economic times. And on 500 meg above, we don’t give out specific details on that. But it definitely is becoming a much larger percentage of our sell-in as well as across the entire base. So we’re not only seeing new customers coming in at those higher speeds. It’s more than 50%. But our base is also upgrading into those 500, 1 gig and 1.2 gig services at a rapid pace, which we’re very excited about because they really like the service that the speed and the reliability and our network is just so strong. So I’m pleased with how everything is performing.

Thank you for taking the questions.

Next question comes from the mind of Dan Day. Your line is open.

Yes. Good morning, guys. Appreciate for taking the questions. First one for me, you came in a little above the net add guidance for broadband subs in the quarter and slightly lowered it for the full year. Just maybe if you could talk about what you’re seeing in the back half as far as broadband net, adds goes. John did talk about like is a challenged environment. Just maybe give a little more color on that. Is it just like we’ve heard a lot about move-related churn being so low that it’s tough to get net adds, is that what’s driving it? Or is there something else you’re seeing out there?

Yes. Thanks for the question, Dan. We’re really seeing a variety of things. I mean, first of all, just overall, the economy is difficult for us to predict. So an abundance of caution, we’re adjusting the guidance on. Inflation is certainly hitting our customers just like the rest of the environment. But in some ways, that’s almost an advantage of customers look for more value and WOW is the value provider with that reliability and speed. We also are starting to see some of those green shoots of seasonality returning back to the way that it was. And we will just see what happens, especially in the third and fourth quarter; especially third quarter is traditionally a fairly good quarter in our industry as is the fourth. But we’re just trying to read the tea leaves and find out what’s happening. We definitely also are enthusiastic about the response that we’ve seen, as I mentioned, from our new products and then what we’re seeing from our edge-out areas. So that’s giving us some good thoughts of what will happen in the future, but also a sober view of what’s happening in the economy. And then lastly, everything we are doing with new products, edge-outs and greenfields, I just want to reemphasize, it’s based on the investments that we can make now because of the two transactions we made last year to sell off five markets, buy down our debt and then refinance our debt. And that is giving us the fuel that we need to grow for the future. So, I think that’s one of the reasons that our net adds are stronger than most – everyone in the industry.

Yes. And not so if we get going back to the Analyst Day, our expansion capital, our growth capital for the year is $80 million, $60 million of which will be for greenfields and it’s anticipated that that we will actually get to that number by the end of this year. So, we are in growth mode right now as well.

Thanks guys. And then we heard some of the larger kind of nationwide cable players talking about the competitive pressures, particularly with fixed wireless and especially in the recent quarter. Are you guys seeing any competition in your footprint? And if you are not, do you think that has to do with kind of the geography of your footprints and where your specific assets are located?

Yes, it’s a great question. Thanks Dan. I think there is a couple of things happening. For one thing, since the day we were founded, WOW has always been about competition and so we are happy to compete. I think the competitive intensity that we bring to the market might, in some ways, hold off other competitors in some ways from coming in. So, we don’t see, I think as much as what our peers are describing in terms of, for example, fixed wireless activity that’s taking place in the market. We see a little bit of that. But I think the speed and the reliability of the services that we provide, both upload and download is very superior and our prices are so competitive that we tend to win on those occasions when we do go up against others. So, in terms of the competitive environment, we are not seeing a significant shift in anything we have seen before. It does appears, I think some of the fixed wireless suppliers are perhaps more in areas where broadband isn’t maybe more rural areas, but we haven’t seen a big focus there.

Great. Well, appreciate it. Best of luck. I will turn it over.

Thanks.

Your next question comes from the line of Kutgun Maral. Your line is open.

Great. Good morning and thanks for taking the questions. I wanted to ask about a few different topics, first on margins. Great to see that margins are now already near where you were prior to last year’s divestitures. Have you continued to execute on the HSD growth trajectory and the strategic efficiency efforts? How are you thinking about the margin expansion opportunity longer term, maybe even away from this year? Has anything changed in your view of the margin profile of the business? And just on that and just on bad debt quickly, unless I misheard or misread, it seemed like bad debt expense was actually lower year-over-year, which is a bit surprising given what we have heard from some of your peers. And so I would appreciate any color on bad debt and if there is any incremental commentary you would be willing to share on consumer payment trends. Thanks.

Let me take the first couple here. In terms of the EBITDA margins, we expect that they will continue to grow. I think it’s an important milestone. We were on a growth trajectory prior to the five market divestiture. We had hit 40.5% EBITDA margin that we are growing. We are at 40.1% today on a smaller company. So, that continues to go the two largest drivers of that, clearly our broadband first, which brings us to a significantly higher gross margin at the top and drive significantly lower operating expenses at the bottom. So, that’s one of the big drivers. And then the other driver that’s going to help that along as we are, as we said, during Analyst Day, cutting ultimately $35 million of stranded corporate overhead out of the business, so no ending sign to that project. So, that’s going to keep going. So, we are very pleased with that. As to the bad debt portion, I think we were very aggressive in the beginning of the pandemic and really beefing up the allowances. We thought we were going to have differently more bad debt issues than we actually did. And so all you are really seeing is a reversal of a little bit of that in the quarter as we wrote off some people who had more difficult times in the second quarter. That’s the disparity.

Understood. I appreciate that. And just lastly, I have to ask about M&A is the number one question that we get from investors. Is there anything you can share about whether or not there is an official review in place for the entirety of the company or at least parts of your asset base, and any other perspectives on M&A? I think we would all be curious about that.

Really nothing to share anything. Thank you.

Fair enough. Thank you.

Your next question comes from the line of Matthew Harrigan. Your line is open.

Thank you. I realized this is not fairly germane to your business. But – well, not all that important. But on the video business, it feels like when you look at some of the larger emboss, you have a slight variance in the HSD number in the market cosmetic and on the video losses, people are just inured to whatever video loss arises. I know you approached it more in the context of stimulate your high-speed business, given the growth in data usage you are seeing on the broadband-only customers. But can you talk about that, how that interlaces with your business and how even things like 4K and which has really been somewhat of a disappointment except for the streamers and ultimately 8K could help your broadband business. Thank you.

Thanks Matt. Yes, what we really have always done is be so customer-focused since once again, since the day we were founded as a business. And we know that customers like to use broadband to watch video. So, they may have traditional legacy video products, but that’s becoming a smaller and smaller portion of our base. But I think it’s over 80% now if the population has at least one streaming service. And so our network is robust to take care of all of those customers’ streaming needs. And as the demand rolls for higher streaming needs, we keep upping the amount of bandwidth that we can provide to those customers. So, we try to take an approach of being agnostic on whether our customers want to take a bundled video service from us or they want to put together their own list of over-the-top streaming partners. That’s fine either way with us. We don’t require our customers to take a bundled service with either mobile or video to get our best prices. And I think that has really resonated well, especially with customers in this tough economic environment who are looking for the best deal. So, we will just always be listening to our customers and go with them, whether it’s streaming or 4K, 8K, whatever the future might bring in our network can hold up to it with its reliability and speed at the very best prices.

Great. Thanks.

Thanks Matt.

Our final question comes from Batya Levi. Your line is open.

Great. Thank you. Can you please go over again where you see the most impact of macro uncertainty on your business right now? You held EBITDA constant despite the promotional pressure. What does that assume in terms of inflationary costs picking up for the rest of the year? And maybe, just a follow-up on if there is any indication for telco fiber building out in your area? Thank you.

Thanks Batya, I will start and John, if you want to weigh in that fine as well. So, on the macro environment, I mean like everyone I know that we can predict the future, but we certainly are seeing the impact of inflation, some in our costs, like gas in the trucks and things like that. But I think we have always been very focused on cost reduction. Certainly, we have been, as we have been ratcheting down our overhead with the proportion of sizing of our business relative to the transactions we did last year. We are very tight on our expense management. And you can see that in some of the numbers that we put forward. And that’s why we feel confident that we can hold on our EBITDA margin for the year and that we have been keeping our long-term targets in place as well. So, we have been offsetting any bits of inflation. And in terms of how it’s impacting our customers, I think for our existing customers, we continue to provide great value. But it also, I think as you can see from our HSD net add numbers, it attracts new customers that perhaps have been paying more with some of our competitors, to really look at us and say, here is an option that is as good or better speeds than what I am getting today at a bit of a better price. So, that creates an opportunity for us in the market. And we are trying to make sure we get that message out. The other thing we haven’t really talked much about today is the affordable connectivity program. That has continued to go from strength to strength for us. We promote that to all the customers for whom it is an option for those who perhaps were in financial hardship. And we make sure that we have as streamlined processes as possible to make sure that they can get on to the service, if available to them. So, those are a couple of ways we are really trying to stem inflation from both the cost side as well as being available to our customers. In terms of the telco overbill looked fiber, we really haven’t seen any increases from what we have seen in the past. Once again, I think as others are being rational in their deployment of capital, they think about where should we deploy where we can get the highest growth. And generally, that’s not where WOW is. So, I think that has been a bit of a barrier to entry. Anything else that I missed, John, or?

No. On the EBITDA piece, I mean look, we are still growing revenues. 87% of new customers come in are HSD only, which were at a high 90 percentile gross margin. And while that’s going on, that increase in gross profit, Batya we are simultaneously on a cost-cutting production here. So, it’s a $35 million identified at Analyst Day, plus we have always sort of been cost-efficient anyway. So, a lot of cost cutting. And we are still growing the business and have a lot of confidence in the EBITDA number.

That’s great color. Thank you.

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

Thanks, Rex. Thank you so much for joining us this morning and thank you for your continued interest and support of WOW. Have a great day.