WOW - NYSE

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Olivia Ponder, Senior Manager, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining our third 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 could -- 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 the non-GAAP financial measures 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 reported 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 for this morning to complement our prepared remarks. Now I will turn the call over to WOW!'s Chief Executive Officer, Teresa Elder.

Thanks, Olivia. Welcome to WOW!'s third quarter earnings qall. I am pleased with our results this quarter, and I'm excited about our strategy and growth for the future, despite what we know will be a challenging fourth quarter. As a management team, we are extremely focused on executing our strategy to drive growth and bring value to our customers and shareholders. It is with that in mind and our continued confidence in our business strategy and outlook that we made a significant announcement this morning in our earnings release. Our Board of Directors has authorized us to repurchase up to $50 million of shares over the next 18 months. It is critical to reiterate that these capital allocation strategies will not materially affect our leverage profile, which remains one of the lowest in the industry. Now let me get to our results. For the third quarter, our total revenue was down 5.6% as high-speed data revenue declined slightly from last year's record quarter, which included a onetime catch-up of previously deferred HSD revenue of $2.9 million. Without this onetime $2.9 million last year, we would have had approximately a 2% HSD revenue increase this quarter. Video and Telephony revenue declined 14% and 10% respectively, from the same period last year. Our pro forma adjusted EBITDA increased nearly 3% to $68.5 million, reflecting the increased proportion of revenue from the high-margin, high-speed data business, which now represents nearly 60% of total revenue. The pro forma adjusted EBITDA margin was 39.4% for the quarter. During the quarter, we added 1,400 high-speed data RGUs, bringing our total to approximately $519,000. With consistent levels of low churn, we once again increased the number of subscribers, both year-over-year and sequentially, ending the quarter with more than $538,000. For the ninth consecutive quarter, we maintained an average selling rate above 87% of our customers purchasing high-speed data only, with the figure reaching nearly 89% this quarter, which further drives our core financial metrics higher, as John will discuss during his remarks. Also consistent with past quarters, new customers are buying the high-speed data tiers with the majority taking speeds above 500 meg, including strong adoption of our recently offered 1.2 gig service. HSD ARPU of $65.80 has stayed largely consistent with prior quarters, as customers purchasing higher data speeds have been offset by the cost of promotional activity, which contributed to the increase in HSD subscribers during the quarter. We believe we will begin to see HSD ARPU increase as existing customers continue buying higher speeds, and as we add fiber customers in new markets. Our Edge-Out strategy continues to drive growth, especially in our 2021 vintage, with penetration increasing to 45%. Our 2022 vintage continues to do well as we pass more homes and maintain a double-digit penetration rate in the early stages of this vintage. Our 2020 vintage remains constant at a 23.5% penetration rate. As we've said before, we believe the performance from our Edge-Out investments supports our confidence in our ability to grow quickly in new markets, including our recently announced fiber Edge-Out into Headland, Alabama and greenfield markets in Central Florida and South Carolina. In addition to our greenfield expansion plans, we continue to focus on enhancing our infrastructure in our existing footprint. This includes a highly efficient path to implementing multi-gig service, leveraging high split architecture and ultimately DOCSIS 4.0. Our technology organization is currently laying the groundwork for this in our lab, and field activity will begin early next year. Our mobile partnership with Reach Mobile is also going well, and as of Q3, has been successfully deployed in all of our markets and through multiple sales channels. Now before I hand the call over to John to discuss our financial results, I'd like to spend a couple of minutes talking about the environment for HSD subscribers and the factors that drove us to reduce our expectations for HSD net adds for the remainder of the year. I would like to emphasize that we believe this issue has not dampened our outlook for our growth strategy, especially as we continue to be one of, if not the least, leveraged company in the space. The first factor is the result of higher inflation, which has been rising faster than anyone expected, driving up interest rates more than anticipated, resulting in a material cooling off of the housing market, which translates into significantly fewer movers. Potential customers moving into our footprint are one key aspect of how we add subscribers. We have a proven track record of successfully competing for that business, as demonstrated by the strength of our growing penetration rates. The second factor, which negatively impacted our projected fourth quarter subscriber numbers, also has to do with the economy, as we have been working with a number of customers to help them stay connected despite customers' competing financial priorities. To this end, we extended customer terms to help them stay on our platform rather than disconnecting their service. Although a portion of these customers did remain on the platform, unfortunately, many ultimately had to be disconnected. We are seeing the impacts of these disconnects flow through our net adds in the fourth quarter. To conclude, the core aspects of our strategy remain strong. Our Edge-Outs continue to increase our penetration rates. Our greenfield expansion is making real progress with customers expected in the first quarter. And importantly, we are doing all of this with cash from operations, thereby enabling us to maintain our low leverage profile. Now I'll turn the call over to John who will go over our financial results in more detail.

Thanks, Teresa. The third quarter delivered solid results despite the volatile macroeconomic environment. We continue to execute on our broadband-first strategy as we are now building for growth. In the third quarter, total revenues declined 5.6% to $173.7 million, reflecting a 1% decrease in high-speed data revenue and a 14.2% and 9.9% decline in Video and Telephony, respectively. The decline in HSD revenue was predominantly driven by $2.9 million of deferred revenue, which was recognized last year in the third quarter, attributed to work completed in Dothan, Alabama as part of the Connect America Fund. Adjusting for that deferred revenue, HSD revenue grew 1.9% year-over-year. This increase is the result of new and existing customers buying higher speed tiers, partially offset by promotional initiatives, which help drive continued subscriber growth. Pro forma adjusted EBITDA grew 2.7% from the same period last year to $68.5 million, driving our pro forma adjusted EBITDA margin to 39.4%. On the next slide, we see the incremental contribution margin growth sequentially and year-over-year to 76.3% as a result of the favorable shift in our base to HSD only. Incremental contribution margin increased 4.5% from the same period last year, which reiterates the importance of this metric, as it represents a strong leading indicator for adjusted EBITDA growth and free cash flow generation. Now for progress update on our cost structure alignment following the divestiture of the 5 service areas. As of the third quarter, our trailing 12 months of savings is $19.8 million. This represents approximately 50% -- 56% of the $35.5 million we identified for reduction over the next few years. We're pleased that we're ahead of schedule on reducing our costs, and continue to be extremely focused on managing our ongoing expenses. We ended the quarter with total cash of $45.3 million and total outstanding debt of $746.1 million, holding our pro forma leverage ratio at 2.6x. In the third quarter, our CapEx from continuing operations decreased by $3 million from the same period last year to $37.7 million. The year-over-year improvement is largely due to decreased spend on CPE, partially offset by investments made in expansion CapEx. Now for an update on Greenfields. Although interrupted at the end of the quarter due to constraints on the public power utilities caused by Hurricane Ian, Greenfields contributed $5.8 million of additional spend, primarily split between engineering and construction costs. We expect slightly lower Greenfield CapEx than planned this year. Looking at the right side of the slide, our third quarter results for unlevered adjusted free cash flow, which we define as pro forma adjusted EBITDA less CapEx, increased to $30.8 million, which is up $4.8 million from the same period last year, enabling us to fund the capital allocation initiatives announced earlier this morning. Finally, before we open the call for questions, I'd like to provide our outlook for the remainder of the year. The macroeconomic environment continues to be challenging with inflation remaining high and interest rates rising, leading to a very difficult housing market, with home sales at their lowest point in many years. As a result of this, and to a much less extent continued competition, we now expect net adds for the full year to be between negative 2,000 and positive 2,000. The change in our outlook for broadband subscribers is driving us to lower our estimates for HSD revenue for the year. We now expect full year HSD revenue to be between $411 million and $414 million. We expect total revenue for the year to be between $702 million and $705 million and adjusted EBITDA to be between $278 million and $281 million. In closing, this was another solid quarter for WOW! in a very volatile environment. Despite lowering our expectations for the remainder of this year, we want to reiterate our conviction and our strategy, our growth prospects, and our commitment to our customers and our shareholders. And now we'd like to open up the line for questions.

[Operator Instructions]. Your first question is from the line of Chris Schoell with UBS Financial.

Maybe you can start by talking a little bit about the competitive backdrop. Thank you for the color on what is driving the broadband subscriber headwinds for the fourth quarter. But would you also say that competition maybe is a bit worse than you might have anticipated? And what are you seeing in terms of impact from fixed wireless relative to new fiber expansion in your footprint?

I'll go ahead and take it. And so, in terms of what we saw in this quarter, I think fundamentally, the issue really going forward for the fourth quarter too, is around the inflation impacts, the interest rates on movers, but also those inflation impacts on people's budgets, and even what we're seeing is some of the consolidation of homes. So, as the kind of growth level of what opportunities are available. It's just a smaller pool than what we've seen previously. One thing I would like to reiterate though is that our churn is staying at record lows. And so, those customers that we have, are being very loyal to us, and we are very successful in competing for those customers that are available to us. One of the things you mentioned is around fixed wireless. And we look at the data very closely, and we are not seeing any kind of material impact on our business from fixed wireless at this point. And just to keep in mind how we would compete with fixed wireless, our speeds are faster. We're completely reliable. So, customers know if they sign up with us, that is the speed they'd be receiving all day. It doesn't vary throughout the day. And our pricing is such that customers can get for the same price, higher speed. And even with our mobile, a customer could get from us for $24.99 both Internet and mobile together if they wanted to pair some of our offerings. So, we feel very good about the offerings that we have, and it hasn't been a big issue. Our salespeople are well versed in how to compete against them. But right now, our main competitors are the same, they always have been, and that is the biggest MSOs and the ILECs that are out there, and we feel very good about our ability to compete with them.

And then maybe just on the buyback. How should we think about the pacing of the buyback over the term of the program. And I appreciate you said it won't impact the leverage profile. But can you maybe remind us how high you might be willing to take leverage for both buybacks and the network expansion plans that you've articulated?

Yes, I'll take that. So, on the leverage question, we're 2.6x levered as of the quarter end. When we sold the 5 markets last year and did our massive deleveraging, we were pretty much on the record of saying we won't be taking leverage anywhere above 3.5x. So, we would not go above 3.5x. And the expectation is, we'll do as much as we can from the free cash flow we generate. And if we were to lever up a little bit, it would be like 1 or 2 of a tariff. It's not going to be a massive leveraging up to do something like this.

Your next question is from the line of Frank Louthan with Raymond James.

I apologize, I got cut off a little bit earlier. But can you walk us through sort of some of the cost pressures that you're seeing? And what steps are you taking to sort of abate those, and how long do you think you continue to see some pressure on the cost line from all of those?

Yes. Well, certainly, like the rest of the world, we are being impacted by inflation, Frank. And I think one of the things about WOW! is that we have always done a good job with cost containment, and that has even been higher on our list over the last year since we did the transactions, selling off the 5 markets last year, and we've been in a process of proportionately sizing our corporate overhead. So, this isn't a sudden knee-jerk reaction to something just happening now in the economy. This is always the way that WOW! has done business, and we've made significant progress on that reduction that we said we would take last year. In addition, I just want to emphasize that over the last few years -- and Frank, you've been following our story for a long time -- we've been transforming the business with our systems and our processes, and all of that is making us more operationally efficient. And we're in a good position now where we're reaping some of the benefits of that operational efficiency, and it's also enhancing the customer experience. So, it's really a win-win there. For example, our number of truck rolls for service calls is down substantially year-over-year just as it has been every year for the last couple of years. That's both because we're more broadband first, and because of all the operational improvements we've made. Anything else you want to add, John or…?

No, that's it. Frank, there's competing things going on here, right? So, we're in the midst of the cost-cutting program, which we said we did $19.2 million TTM versus $35 million we promise to get to over 3 years. So those costs are cutting out, and then it's slightly mitigated by a little inflationary impact on the numbers. So, we're sort of keeping a steady state, if you will. So, we're not getting as much of a boom for the cost cutting because it's being absorbed a little bit by inflation. But we're doing everything we can. And as Teresa said, with all of the process improvements and all the things we've done in the back office, we're really very, very focused on continually driving cost out. So, it hasn't been too bad, but it's a day-to-day battle, but we're working on it.

So, did something change in the quarter? I mean, lowering the guidance sequentially for the EBITDA, just was there something that came in cost-wise you didn't expect back in August, or what was it that shifted?

No. I think when we take -- as you know from the other guidance, we're taking down the HSD number -- HSD adds number for the year, and that just flows through the P&L. So that's the takedown. So, if we look at the takedown on guide of HSD revenue and for EBITDA. They're both coming down about 1%, is the takedown. So, it's really a factor of the less adds that will be coming in through the quarter. That's the big…

Your next question is from the line of Grant Joslin with Credit Suisse.

Two, if I can. First, we've kind of heard mixed commentary from your peer operators about whether fiber build costs are still manageable or if they're increasing. So, what has WOW!'s experience been? Can the fiber build still have as strong an ROI as when they were initially planned? And then second, if I did my math right, it looks like the high-speed internet revenue guide appears to suggest a pretty significant step-up in 4Q's ARPU compared to 3Q or last year. So, does that reflect a rate event or a big shift in other factors affecting ARPU? And is there any change to WOW!'s strategy of being the low-price operator in its territories?

I'll start out and then hand it off to John to add some more color. So, on the fiber build, we are as excited and bullish as we've ever been on what we're doing with our greenfield markets. And we also talked about what we're doing in Headland, Alabama, with ouer fiber Edge-Out. So, we feel very good about those prospects. And in terms of the ROI, our business case looks as solid as it always has. One thing I also want to reiterate on Greenfield and our buildis that we really have been managing our strategic sourcing very tightly, getting the materials that we need in the warehouse so that we can keep rolling. And we have continued to have great strength there. We had just a very slight slowdown with Hurricane Ian, not because the hurricane actually impacted the markets very much that we serve. So, it's not that. It was just some of the resources that we rely on, such as our power company partners, obviously, their focus was on the restoration, as it should be. So, there was just a very slight delay there. But we still are on track, as we have said, to launch in the first quarter, and feel very good about that. On HSD revenue, the growth in ARPU that we continue to forecast really is largely because customers continually take higher speed tiers. So that's both our existing base as well as new customers coming in at higher speeds. We've been especially pleased with the take rate of our newest service, the 1.2 gig tier, and that, I think, is really resonating well with our customers.

And the ARPU increase granted is speed tier ups for the existing base. It's higher speed tiers for new customers and to a lesser extent promo roll-offs. We had our fair share of promo and then they come out of the numbers. So, expectation is ARPU to increase.

Your next question is from the line of Dan Day with B. Riley Securities.

So I know you're not giving sort of longer-term guidance here, but just, should we be thinking about net adds outside of Greenfield and the Edge-Out, so just talk about the legacy well markets being roughly flat over the next few years, as seen any change to this low move-related churn? Is that really the big variable to look for? Obviously, the economy -- but really is it just sort of this moving environment is -- what's going to move the needle for net adds for the next 2, 3, 4 years?

Yes. Well, I don't have a crystal ball for all of that, Dan, but I can tell you that we have continued to grow the penetration within our legacy markets, and we still anticipate doing that. We compete very effectively in our legacy markets and as well as our new Edge-Out markets. We offer customers a high-value, reliable fast connection. And especially as customers are looking at their budgets, WOW! is a great offering and an alternative for those customers. At this time, we're not giving projections for next year or beyond, but we still feel very good about the plans that we've had in place, and the projections for the fourth quarter are not ones that we're extrapolating to the future.

Can you just give us a time line on the -- sorry, an update on the timeline to maybe your first Greenfield customers? Is that kind of still first half of 2023 ?

We're actually saying first quarter. So, first quarter '23.

Your next question is from the line of Brandon Nispel with KeyBanc.

Two questions, if I could. Teresa, I was hoping you could put maybe a little bit more finer point on the implied fourth quarter net add loss. How much of it is voluntary versus involuntary churn, versus maybe lower gross adds. Hopefully you can help quantify us to help us get a little bit confident that it's not competitive. And then for John, similar question as others, the guide for fourth quarter on HSD revenue and EBITDA is a pretty meaningful step up. Maybe could you quantify the promotional expenses this quarter, and where we should see ARPU coming in? It's hard to get to even the low end of the guide with the run rate the business is at.

I'll take the first and then turn it over to John. So, in terms of the fourth quarter loss that we're anticipating in the guidance numbers that we put out, we are seeing, like we said, a couple of things happening. There is this kind of onetime churn wave that we really are attributing to those who needed some additional financial assistance throughout the hardship. So, the bulk of what we're seeing coming through is in voluntary to your point. And then, John, did you want to talk about the -- some of the comments on revenue and EBITDA?

Yes. So, Brandon, so the -- again, HSD ARPU should continue to climb just due to the normal stuff, speed tier ups and people buying into higher. Talked a little bit before about promotional roll-offs. The other side of some of these customers we were working with is, when we take them out, it's a hit to revenue. It's a negative revenue. So, it's a one shot and then that -- we won't see that anymore. So, it's a sort of kind of a promotion. We were trying to work with these people to save them. We hit revenue and then we won't be hitting revenue going forward. So, we'll get a nice big jump back on the HSD rev line. It's just accounting stuff.

Your next question is from the line of Kutgun Maral with RBC Capital Markets.

This is Patrick Jackson on for Kutgun. Can you share an update on the success you've seen with your go-to-market strategy with wireless and the opportunity WOW! sees with bundled broadband and mobile offers? How have conversations gone when selling to existing broadband subscribers, and are there any read-throughs to retention trends or other metrics you expect from these customers going forward as a result of converged offers? And just last, how do you see your position to increase your share in the markets where the offerings are available?

So, on wireless, we really have -- this is kind of the first quarter where we've really started to have it launched in all of our markets and across many of our sales channels. So, we're still at the very initial stages. And I would say we have had success with both existing customers buying the product as well as new. And with mobile, we also have the opportunity to sell the customers that haven't had one of our products previously. That's a very small number, but we're experimenting with all of those. I'd say right now, we're still in too early days to see any kind of an impact on churn, because customers just haven't been with us with the mobile service long enough to really see the impacts of that in comparison. But what we believe is that this will be a stickiness to the bundle. As you know, my background is also in the wireless industry. And I think this is a pairing that makes sense. So, we are experimenting with how we do those bundles and how we get feedback from customers, and are still very much in those initial stages as we look at our offerings. But so far, so good, we were very pleased that we went from really the inception of wanting to do this, to launch very rapidly. I think it was 6, 7 months, and we've got this up and running, which just shows you about the strength of our agility and our ability to launch new products, which I think is part of the -- really some of the benefits of WOW! is that we're very agile as a competitor and can do new things very quickly. But we plan to keep you posted as we go further.

Your next question is from the line of Matthew Harrigan with Benchmark Company.

Most of my questions were answered, but I was curious if you could give us a further update on trends for broadband. And also, it feels like you've got pretty good pricing power possibly moving forward, and I was curious what you could do in terms of the enrichment? okay to really enhance just the appeal of people moving to a faster speeds?

So, in terms of usage trends, we really continue to see customers increase their usage. We, as you know, over the pandemic back in 2020 saw a huge leap in usage. And then that growth has slowed some in '21 and '22, but it has never gone back. So, we still are at that higher usage amount for customers. And one of the things that we're seeing is customers wanting to take higher and higher speed tiers. So, I think that's a very positive sign for us, for our industry, and it also shows the strength of our network that it just keeps going from strength to strength as customers use more and more. We continue to see customers increasing their usage, both on upload as well as download. Probably upload is increasing even a little bit more with different applications, and we're well equipped for all of that. So, we're excited to see those trends and glad that customers continue to enjoy the speed and reliability of our network. In terms of our pricing power or future enhancements, I think what you're talking about is how we might customers to move up to higher speeds. And we definitely do that in our promotions and our packaging that, as customers move up to higher tiers, I think there are benefits to them. And so, that is one of the reasons that I think customers more and more are taking 500 meg and above. So, we try to build that into our pricing models. And I do think we have been successful in listening to our customers and making sure for our investors that we don't leave money on the table either. Does that answer your question, Matt?

And I assume it -- As a complement to the raw higher speeds, I assume you're also emphasizing advanced WiFi and some of the other new building blocks in the future, if it's okay to push people along?

Absolutely. Definitely. Our -- we always have our add-on services and security and on the whole home WiFi and number of other things to continue to enhance the experience for our customers. And once again, just that reliability that's there throughout the home all day long through our services, and I think that is just such a key advantage of ours, over some of the other newer technologies.

At this time, there are no further questions. I will now turn the call over to Teresa for any closing comments.

Thank you. Just to reiterate again, we have so much confidence in our ability to execute for growth for the future, and that's really unaffected by the current challenging operating environment. The strength of our balance sheet is absolutely key, and we're really investing in our growth strategy without increasing our leverage profile, and that's a unique position that we're in. I'm so pleased that we've announced this buyback authorization. It really highlights the conviction in our strategy and our belief that our stock is undervalued. So, thank you for calling in today. Thanks so much for joining us and your continued interest and support of WOW!. Have a great day.