WOW - NYSE

Thank you for standing by. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest, Q1 2023 Earnings Conference Call. [Operator Instructions] Thank you. I will now hand today's call over to Andrew Posen, Vice President, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining our first quarter 2023 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 that these 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 this morning to complement our prepared remarks. Now, I'll turn our call over to WOW!'s Chief Executive Officer, Teresa Elder.

Thanks, Andrew. Welcome to WOW!'s first quarter earnings call. I am pleased with our results this quarter, especially as we continue to execute on our expansion strategy. Our 2021 asset sale, built a solid foundation and a clean balance sheet, which enabled us to focus on our strategy with a clear vision to drive growth. As we report our first quarter results, we are seeing significant progress on our greenfield initiatives in Central Florida and South Carolina, as well as in our fiber-to-the-home edge-out in Alabama, all while delivering financial results that were in line with our expectations. Importantly, we continue to do this with cash from operations while maintaining a very low leverage ratio. In the first quarter, our total revenue decreased 1% from the same period last year as a 5% increase in high-speed data revenue was more than offset by declines in Video and Telephony, which dropped 13% and 9%, respectively. Our adjusted EBITDA decreased 2% to $65.2 million, largely reflecting the upfront costs associated with our expansion in Central Florida and South Carolina. The adjusted EBITDA margin was 37.9%. During the first quarter, we lost 2,900 high-speed data RGUs, bringing our total HSD subscribers to approximately 509,000. The reduction in HSD RGUs also drove the decline in our total number of subscribers, ending the quarter with more than 527,000. Despite a reduction in HSD RGUs, our operating metrics continue to be strong. For the eleventh consecutive quarter, we maintained an average selling rate of approximately 87% or higher of our customers purchasing HSD only. Also consistent with past quarters, new customers are buying higher data speeds with approximately 75% taking speed above 500 meg, including further momentum in customers taking our 1.2 gig service. We are seeing an even stronger dynamic in our new greenfield market where more than 90% of customers are buying speeds of 500 meg and above, including a number of customers taking either our 3 gig or 5 gig services. These statistics demonstrate the strong demand for faster and higher speeds and the superior quality and reliability of our network. It also reinforces our confidence in our ability to continue taking share in our new markets. HSD ARPU increased year-over-year from last quarter's normalized figure to $68.70, driven by customers purchasing higher data speeds, and the full effect of the rate increase that was introduced to a portion of our base last October. We believe we will continue to see HSD ARPU increase as we add fiber customers in new markets, including greenfields and edge-outs and as existing customers continue to upgrade to higher speeds. Our expansion strategy continues to show positive results and build momentum, especially in our most recent vintages. Our 2023 vintage, which includes our new greenfield market in Central Florida, reported an early penetration rate up 23.5%. Our 2023 edge-out vintage is showing early promise with a penetration rate of 10.7%. The 2022 vintage increased its penetration rate to 27.6%. And the 2021 edge-out vintage continues to be particularly strong with penetration rate staying constant at 45%. As we had said before, our expansion strategy remains an engine of growth for our business and the performance in those markets further supports our confidence in our ability to grow quickly in new markets. Now, I would like to spend the next couple of minutes providing an update on our greenfield expansion initiatives. As we said last quarter, we're making significant progress in Central Florida, where as of March 31st, we passed 1,700 homes and have seen fantastic reception in the market, achieving a penetration rate of 23.5% in less than three months. In fact, considering that we added our first customer on January 25th, I'm particularly pleased with our progress and proud of the effort of our team driving this exceptional momentum. We expect the pace of adding homes passed to increase significantly throughout the year. We have continued to build out our footprint with construction well underway in additional Central Florida communities. Construction is also advancing in Greenville County, South Carolina, where we expect to begin providing services to consumers in several communities in the near future. The progress in these new markets represents the first phase of our commitment to bring our reliable, state-of-the-art fiber network to 400,000 homes passed in new service areas by 2027. We are excited about the initial returns in our greenfield markets and new fiber edge-outs. The core aspects of our strategy remain strong. And importantly, we are doing all of this with cash from operations, which enables 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. 2023 is off to a good start. Our high-speed data business continues to grow. We're seeing strong initial results in our new markets. Construction is moving along at a great pace, and we are maintaining a low leverage ratio, which puts us into a fantastic position to further execute our expansion plans. In the first quarter, total revenue decreased 1.4% from the same period last year to $172.2 million, reflecting a 5.1% increase in high-speed data revenue and a 13.4% and 9.0% reduction in Video and Telephony respectively. The increase in HSD revenue reflects a full quarter impact of last quarter's rate increase on a portion of the base as well as new and existing customers upgrading to higher speed tiers. Adjusted EBITDA decreased 1.9% from the same period last year to $65.2 million, largely driven by higher upfront spending on expansion initiatives with revenue expected to follow later this year as well as higher operating costs in our core business related to inflation. The mix shift in our revenue continue towards a greater proportion coming from HSD, which increased to 61.1% of our total revenue this quarter. The incremental contribution margin decreased sequentially, but continued to grow year-over-year. The sequential decline is largely due to the timing effect of the video programming cost increases, which took effect in January, whilst the corresponding rate increase was applied to customers in March. The year-over-year increase continues to reflect the favorable shift in our base to HSD only. Incremental contribution margin increased by 2.7 percentage points from the same period last year. Now for a progress update on our cost structure alignment following the divestiture of the five service areas. We continue to be on pace to hit our target of $35.5 million by the end of 2025, although the pace of cost reduction has been somewhat tempered as we shift headcount to our expansion into new markets. As of the first quarter, our total savings equate to $22 million, which represents approximately 62% of the $35.5 million we identified for cost reduction over the next few years. We've made tremendous progress on realizing these savings, and we'll continue to be diligent as we manage costs despite the higher inflationary environment. We ended the quarter with total cash of $21.2 million and total outstanding debt of $791.2 million with our leverage ratio at 2.8 times. We reported total capital spend of $60.2 million, up $18.1 million from last year. Our core CapEx efficiency remained at 18.5% in the first quarter. Expansion CapEx increased $23.5 million as we continue to heavily invest in our future growth and bring fiber to the homes of Central Florida and Greenville, South Carolina. In the first quarter, we spent $20.2 million on greenfields, $4.2 million on edge-outs and an additional $3.9 million on business services. Expansion CapEx spend on greenfields will continue to trend at this level throughout the year. Looking at the right side of our slide, our results for Q1 2023 unlevered adjusted free cash flow, which we define as adjusted EBITDA less CapEx, decreased to $5 million, down from $24.3 million in Q1 2022. This was primarily driven by the share repurchase program and higher expansion spend predominantly on greenfields. This morning, we disclosed in our 10-Q that we settled litigation on a 2018 patent infringement lawsuit for $48 million, including $27 million that will be paid in May and the remainder paid over the next three years. This does not impact our expansion plans in any way, and we remain excited about our progress in new markets. In the first quarter, we repurchased approximately 1.9 million shares totaling $21.1 million at an average price of $10.88 per share. Since inception of the program and through the end of the first quarter, we've repurchased 3.1 million shares for approximately $33.4 million of the $50 million authorization. And finally, before we open the call for questions, I'd like to provide our outlook for the second quarter and the full year. For the second quarter, we expect HSD revenue to be between $106 million and $109 million, total revenue to be between $173 million and $176 million and adjusted EBITDA to be between $65 million and $68 million. We also expect HSD net additions to be between negative 4,000 and zero. We're maintaining our full year guidance as we are seeing significant progress in our base business and strong momentum in new markets. For the full year, we expect HSD revenue to be between $437 million and $441 million, total revenue to be between $703 million and $707 million and adjusted EBITDA to be between $286 million and $290 million, reflecting continued investments related to market expansion. We expect to add between 6,000 and 10,000 HSD RGUs for the year as we add more fiber-to-the-home passings throughout the year. In closing, this was another solid quarter. Our conviction in our strategy, our growth prospects and our commitment to our customers and our shareholders hold strong. And now, we'd like to open up the line for some questions.

[Operator Instructions]. Your first question is from the line of Frank Louthan with Raymond James.

Great. Thank you. So, you've been in a pretty active build mode for the last couple of years, but the reported homes are kind of flat. Maybe you can just talk us through why that is. And in the last couple of quarters, you've been seeing subscribers down and you're calling for subscribers down again in Q2. Can you walk us through what's going to cause the significant inflection in the back half of the year that's going to get you to positive subs? And will that also results in hitting the midpoint or better of the guidance. Thank you.

Thanks, Frank. Yes, a couple of things. First of all, starting out with homes passed that looks kind of flat for this quarter, although, of course, we did add on past both in the edge-outs and the greenfield areas. There are always some adjustments that are done to the overall homes passed every so often. We had some cleanup of some multiple dwelling units where there maybe were fewer homes that were built than originally planned. So that kind of netted that all out. That's why you're seeing that dynamic on homes passed. But of course, on the charts, we did show you what we've actually been building. And, in terms of the build process, we have the permitting and the walkout and all of the things that go into the build process before you actually deliver activated homes passed. So, there is that ramp-up time, and we're really seeing the machine start to take off. So, as we look at this quarter in our base as well as in greenfield, we're seeing very low churn continues to be something that we experienced at WOW!. The demand for new connects, I would say, on the legacy side continues to be soft, just with the macroeconomic conditions. But I am pleased that we saw significant improvement in the loss of net adds compared to the fourth quarter. And, as we build those new homes and they really start to come on in-force, as we look at the back half of the year, that's where we're really going to see those subscribers take off as well as the improvement that we're seeing within the legacy business as well, just with tactics as well as with some of the macroeconomic trends that might be getting a bit better. So does that answer your question, Frank?

So what are the tactics that you're going to use to turn the tide in the legacy business? And what gives you the confidence that the new homes coming on are going to see the sort of explosion of growth that we haven't seen so far?

Yes. Well, one of the things that we can do at WOW! is really localize many of our strategies. And what we're seeing is that although connect has been soft for the last year or so just with the softness in the whole economy, we're seeing a little bit of pickup, we could find that we compete extremely well with the offerings that we have, our fast, reliable network at some of the best prices that are out there, really seems to resonate well with customers. So, we've seen the very end of the first quarter and even a little bit at the beginning of the second quarter, some upticks. So, pleased with seeing that in the legacy business. And as you've seen, we feel very good about the areas that we have selected for both greenfield and edge-out where we can get these very incredible pops of penetration quickly. So that 23.5%, for example, in Central Florida, we just started there January 25. The 10.7% penetration that we're already seeing in Headland, Alabama, we started mid-February. So those are very quick results, and we're pleased with the reaction that we're seeing in those markets. So that's why I have a lot of confidence in our ability to execute both buildings as well as driving sales.

Okay. Great. That's helpful. And when you're not winning a customer and what's sort of the overarching competitive factor? Is it the wireless bundles that you -- that the cable competitors are throwing in there, what would you say is sort of the main factor when you look at -- when you don't win?

Yes. I would say head-to-head, we usually win. And so it's just if the customer is not choosing to perhaps switch or there's just fewer moves and fixed wireless really continues to be a non-factor in our market. So, I would say if we have the opportunity to be in front of the customer, we are very successful with our close rates.

All right, great. Thank you very much.

Thanks Frank.

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

Yes, good morning guys, thanks for taking the questions. So John, you mentioned higher operating costs in the core business just related to inflation. Maybe just if you could dig in a little more there where exactly you're seeing that inflation? Is it just wages? Is there anything else in OpEx that's hitting you from an inflation perspective?

No, nothing dramatic. I mean it's -- of course, every year -- every year, we have the national average merit increase, so we got that one. A little bit of pricing increases across the board. I think the bigger things we see, if we're looking at OpEx versus last year and EBITDA versus last year is this year really introduces more of an upfront cost or upfront spend relating to greenfield. So remember, you go into a market, you have to do like a Blitzkrieg marketing campaign. There's a lot of stuff we do that does not get capitalized on the front end. So that's some of what we're seeing. Slight increases in pricing and annual raises. So that's the inflationary pressure.

Okay. Thanks. And then it looks like you pulled on the revolver in the quarter. Just talk about the decision to do that now. I'm assuming part of it is just the greenfield CapEx is ramping up. I don't know if it was influenced by the settlement of the patent litigation. Just any commentary there? And is the plan really to pull that full amount over the next couple of quarters?

No, it's not. I mean -- so again, we are at 2.8 times levered. When we first did the big reduction in debt, we were at 2.5 times to 2.6 times levered. My commitment was to keep us below 3.5 times levered. So, that's not the intention. So we've got a couple of things going on at the same time. We're spending heavily on the greenfield. The Board authorized doing the share repurchase program, which we authorized $50 million. So you realize that we were $33 million at the end of the quarter, we're almost done. And you got the Sprint litigation. So that -- the intention is not to just keep drawing down on nothing to take it up to its total, which if I did, I think that put us at 3.5 times levered, but that's not the plan.

All right, great. I'll turn it over. Thanks guys for taking the questions.

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

Great. Thanks for taking the question. Following up on Frank's question, can you talk a little bit more specifically about the ramp you expect in HSD revenue, EBITDA and HSD subscribers? On my math, when you look at first half versus the quarterly run rate that you need in the second half, you need to get to $113 million in HSD revenue quarterly versus less than $107 million. And based on your guide, EBITDA needs to get to $78 million versus the guide of $66 million this quarter and HSD net adds need to get to 6,000 a quarter versus you're running at a minus 2,000, obviously. So, I would appreciate a little bit more detail in terms of how you get to your guide and why we shouldn't be just expecting sort of the low-end of the guidance this point of this year.

Yes. So, Frank the homes are -- the new homes are being built as we speak. There is a massive ramp. So if you think about -- we disclosed today $20 million were spent in Q1 towards the greenfield initiative. So, just think of at that pace, there will be tens of thousands of more homes to sell into as we report the next quarter back to you. The ability to sell into those homes and the penetration rates into the new homes built are coming very, very quickly as we've seen. And remember, when we did the whole greenfield initiative from myriad factors that were looked at, but one of the principal factors was we were handpicking markets where there is de-minimis competition with a large player and maybe a very small player that are providing very good service at a higher price. So, we feel really comfortable with particularly with based on what we've seen in our edge-out fiber markets and in the greenfield markets built that we're going to hit those numbers. So yes, you're right, you're going to see a big back half of the year, and that's what I have modeled and that's what we think is going to happen for sure.

John, can I just follow up on that? When you say tens of thousands of new greenfield homes, are we talking about 15,000, 20,000 or are we talking about 50,000 or 60,000? And then can you just address the core business in terms of HSD net adds? I mean, when we back out greenfield and edge-out additions from the reported numbers, it looks like the core business continues to lose subscribers. So can you provide some color on when that will turn as well? Thanks.

Yes, I think -

Maybe I -- let me - feel into jump in just a little, John, and then we can tag team it. So, I think in the second quarter, we're really starting to get the machine rolling to deliver those homes passed. So, I think cumulatively, we could be at that -- close to that 10,000 mark for second quarter. And then, it really ramps from there. Keep in mind, we will be working in multiple markets, not just one delivering homes passed. So, I think that ramp for the year is significant, and you will see them following that, of course, the penetration with all the subscribers. So we feel good about that. With that said, we also are doing a lot within our legacy markets and pleased with the progress that we've been making there with a number of offerings. So, it has continued to grow in terms of ARPU and just getting more efficient in everything we're doing in the legacy markets, while we continue to have very low churn and compete very effectively at a local basis. But most of the upside of growth, I'd say, clearly, is going to come from these new markets where we're just really seeing great reception from the customers.

Okay, great. Thanks for taking the questions.

Thank you. I will now hand today's call back over to Teresa Elder for any closing remarks.

Thank you, and thank you all so much for joining us, and I appreciate your continued interest and support of WOW!. Have a great day.