WOW - NYSE

Thank you for standing by, and my name is Robert McCarthy, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the WideOpenWest Q2 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a questions-and-answer session. [Operator Instructions] Now, I'd like to turn the call over to Andrew Posen, VP, Head of Investor Relations. Andrew, go ahead.

Good morning, everyone, and thank you for joining our second 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 statement 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 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 the call over to WOW!'s Chief Executive Officer, Teresa Elder.

Thanks, Andrew. Welcome to WOW!'s second quarter earnings call. Our results this quarter continue to reflect our strategic focus on market expansion, strengthening our legacy footprint and aggressively managing our customers, our cost base. WOW! is undergoing two significant transitions. First is our market expansion. We are committed to building 400,000 fiber Greenfield homes by 2027, which accelerates our transition to a broadband business. Additionally, we are also increasing our Edge-Out activity with both advanced HSD, which can enable DOCSIS 4.0 and 10G capability as well as fiber-to-the-home Edge-Out in certain markets. We are pleased to share that as of the end of July, we have added 16,900 new homes passed so far this year in both Greenfield and Edge-Out areas, which is more than we've added in the last three years combined. I'm pleased to share that we are on pace to achieve more than 50,000 new homes passed this year, more than the last four years combined. These market expansion initiatives continue to be central to our strategy and represent the core thesis of our growth and value proposition. In Q2, we saw success in improving our legacy footprint while adding new homes passed in our Greenfield and Edge-Out markets. Importantly, the growth of new customers in these areas is exceeding our expectations. Our second transition is primarily within our legacy base. We made the shift to broadband-first a few years ago, and we have seeing our margin consistently grow, while customers appreciate our high speeds and good value with great service. We listen to our customers and embraced streaming and the customer's desire to cut the cord on traditional video services. We just launched the next step in our transformation to a broadband business which involves transitioning our low margin Video business to a high margin streaming service. We believe this partnership with YouTube TV creates a competitive advantage and presents an excellent opportunity to offer customers what they want at an exceptional price point. YouTube TV gives customers a more robust choice of programming at savings of hundreds of dollars annually over traditional cable. Customers get an additional discount off of YouTube TV, when they subscribe with WOW!. They also get a discount on add-ons, like the NFL Sunday Ticket, which is exclusive to YouTube TV. In addition to the benefits to our customers, we will be able to accelerate the reclamation of bandwidth previously used for our legacy video service. This allows WOW! to efficiently transition our network for DOCSIS 4.0 and serve the growing demand for customer usage without overbuilding our own network. YouTube TV also allows us to transition away from higher cost, low margin video to a high margin service with an even greater mix of channels. What we are doing is unique among cable operators, and is giving customers more of what they really want at a much better price. These initiatives represent the phase of the strategy that we articulated at the end of 2021. With regard to HSD subscribers, we saw a steady improvement as we make further progress in our base and continue to be on-track to return to growth this year. During the second quarter, we lost 900 high-speed data RGUs, which was better than expected, and as of the end of the second quarter, we now have approximately 508,000 high-speed data subscribers. Our Video business declined further during the quarter, which we expect to continue as a significant number of customers are no longer taking traditional video and choosing to stream content instead. As mentioned, the new partnership with YouTube TV presents a fantastic opportunity to capitalize on this trend, and we believe will also drive an increase in HSD subscribers. In fact, we are seeing an uptick in HSD connects already, just one week after launching YouTube TV. This new video model also will decrease our operating expenses over time, since we will see fewer truck rolls and calls into the call center than from our traditional video. We expect to see positive contribution this year to a limited extent and a more meaningful contribution next year. Our broadband-first strategy continues to be reflected in our metrics as 87.1% of new customers purchased HSD only. This is the 12th consecutive quarter with an average sell-in rate of approximately 87% or higher. Demand for higher speeds is not abating either. In fact, our record share of new customers is buying higher speeds than ever. Our high-speed data only selling mix showed that a record high of 91% of our customers, new customers are buying speeds of 200 meg or above, and approximately 82% are taking speeds above 500 meg, including further momentum in customers taking our 1.2 gig service. As we’ve said before, this trend is even more pronounced in our new markets, where nearly 94% of customers are buying speeds of 500 meg and above. 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. High-speed data ARPU increased to a record $70, reflecting the full effect of the rate increase that was introduced on March 1, for a small number of customers and to a greater extent, customers purchasing higher data speeds. High-speed data ARPU will continue to increase in the back half of the year, as we see the impact of an HSD rate increase that was put into effect on July 1, to another portion of our base that weren't impacted in March. We also expect ARPU to grow as existing customers upgrade to higher speeds and from the addition of new fiber customers in Greenfield markets and new Edge-Out. I would like to spend a few minutes providing an update on our expansion strategy which is really starting to accelerate. Through June 30, we passed a total of 11,700 Greenfield homes in Central Florida and in our Edge-Outs. Since the end of June, we added another 5,200 homes, bringing the total number of new homes passed this year in Greenfield and Edge-Out to 16,900, which is nearly six times the number of new homes added in all of 2022. In fact, since the beginning of 2021, we have now passed nearly 22,000 new homes, of which nearly 78% were added this year. We expect the pace of adding homes passed to continue to increase throughout the year. As you can see in the slide, response to our entrance to these markets has been fantastic. The Greenfield homes are built with the latest fiber-to-the-home technology, and our 2023 Edge-Outs are utilizing either fiber-to-the-home or new technology for HFC which puts us on the road to DOCSIS 4.0 and 10G capability in those markets. The strength of these technologies is absolutely contributing to the strong penetration rates that we are seeing. The chart on the right hand side of the slide shows exactly how successful our expansion strategy is, with strong penetration rates across all of our vintages. Our 2023 vintage of Edge-Outs are already at 23.4% penetration rate. While our 2021 and 2022 vintages also reported exceptionally strong penetration rates of 45% and 31%, respectively. And while our Greenfield markets are at 20% penetration in aggregate, they are averaging penetration rates of 30% in 30 days from launch, now that’s a 1% increase in penetration per day. This is substantially factor than we expected in our original business case, which tells us we picked the right market and our playbook is resonating with customers. Edge-Outs are also performing very well with early penetration rates that exceed our expectations, and demonstrate the extremely strong reception to WOW!’s high-speed internet, exceptional customer service, and competitive value proposition. As we said before, our expansion strategy remains an engine of growth for our business, and the performance supports our compass and our ability to grow quickly in new markets. While we haven't externally announced a target for new homes passed for 2023 before, we now feel confident in saying that we will surpass 50,000 new homes in 2023 between Greenfield and Edge-Outs. To conclude before handing the call to John, we are in the midst of two major transformations of our business. First, the expansion of our homes passed through Greenfield and Edge-Outs. Already this year, we have built nearly six times more homes than all of last year, and well more than the last three years combined. We are driving subscriber growth faster in those markets than we've planned. Second, we are continuing to transform our legacy footprint through the next phase of broadband-first through our unique partnership for a cable operator with YouTube TV, which gives us a lower cost higher margin service that is more attracted to our customers and efficiently accelerates our path to DOCSIS 4.0. Our strategy, our plan, and our execution continue to put us in a good position to deliver value to our customers, employees, and shareholders as we look to the remainder of this year and into 2024. Now, I'll turn the call over to John who will go over our financial results in more detail.

Thanks, Teresa. In the second quarter, total revenue decreased 2% from the same period last year to $172.6 million, reflecting a 4% increase in high-speed data revenue and a 12.8% and 6.2% 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 3.5% from the same period last year to $68.1 million, as we continue to invest in growing our expansion footprints in Central Florida, South Carolina, and Edge-Outs. There are upfront costs associated, upfront operating costs, which we incur while developing a new market. Through June 30, total market expansion operating expenses totaled $2.1 million, which was a drain on EBITDA as the expenses are incurred before the market goes live. This dynamic will start to normalize as we continue to increase our expansion subs. Our adjusted EBITDA margin was 39.5%. The incremental contribution margin increased sequentially and continued to grow year-over-year, driven by the proportionate increase in HSD revenue, which increased to 62% of our total revenue this quarter, up from 58% in the same period last year. 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 $35.5 million by the end of 2025. As of the second quarter, our total savings equate to $24 million which represents approximately 67% of the $35.5 million we identified for cost reduction over the next few years. In addition to these measures, we've also implemented additional headcount reductions predominantly in our corporate and administrative areas that are reflected in integration and excluded from our adjusted EBITDA. We've made tremendous progress on realizing savings across the Company and we will continue to be diligent as we manage cost despite the higher inflationary environment. We ended the quarter with total cash of $23 million and total outstanding debt of $868.1 million with our leverage ratio at 3.1 times. We reported total capital spend of $63.6 million which is up $28.9 million from last year. Our core CapEx efficiency increased to 19.2% in the second quarter. Expansion CapEx increased $22.5 million from the same period last year, as we continue to heavily invest in our future growth and bring fiber-to-the-homes of Central Florida and Greenfield, South Carolina. In the second quarter, we spent $23 million on Greenfields, $3.7 million on Edge-Outs, and an additional $3.7 million on business services. Looking at the right side of the slide, our results for Q2 2023 unlevered adjusted free cash flow, which we define as adjusted EBITDA less CapEx, decreased to $4.5 million, down from $35.9 million in Q2 of 2022, primarily driven by the share repurchase program and higher expansion spend predominantly on Greenfields. This morning, we reported a net loss of $101.7 million, this is due to a non-cash impairment charge that we took as a result of the decline in our stock price during the quarter. This charge, which is a non-cash accounting adjustment does not affect our ability to manage our business or alter our investments in Greenfields, Edge-Out to any aspect of our expansion strategy, and we remain excited about our progress in the new markets. In the second quarter, we completed our share repurchase program and repurchased approximately 1.8 million shares at an average price of $9.37 per share. Finally, before we open the call for questions, I'd like to provide our outlook for the third quarter and full-year. We expect our third quarter HSD revenue to be between a $109 million and a $112 million and for the year, to be between $437 million and $441 million. Our transition to YouTube TV is impacting our outlook for total revenue. We just launched our new video offering, which is replacing our current video delivery service. This will result in lower total revenue because we will recognize the YouTube TV revenue on a net basis, unlike current video revenue, which is reported on a gross basis. In the near-term, as we migrate our customers and add new subscribers, the impact will drive total revenue lower. As the business scales and grows, this transaction will have a significant and positive impact on our EBITDA and EBITDA margins. Over time, we anticipate our new video strategy will drive down calls to our call center and video related truck rolls. Today, we are lowering total revenue for the third quarter and for the full-year and expect third quarter total revenue to be between $173 million and a $176 million and be between $691 million and $696 million for the full-year. We expect our third quarter adjusted EBITDA to be between $70 million and $73 million and be between $286 million and $290 million for the full-year. For HSD net adds, we are maintaining our expectations for the year. We're seeing significant progress in the pace of construction in new markets, and we're excited by the increased number of homes passed and the penetration rates that we have been realizing as we light up those new homes. We're also seeing the benefits in our legacy markets as we see ARPU growth within our subscriber base and increasing HSD growth with the addition of YouTube TV as our streaming service. We expect third quarter HSD net adds to be between negative 1,500 and positive 500 and continue to expect the full-year to be between 6,000 and 10,000 net adds. We believe that we are now at a true inflection point in our transition to a broadband-first business. Our market expansion initiatives are now accelerating and delivering results as seen in the strong penetration rates. Our partnership with YouTube, which transitions our Video business to a live TV streaming service, will give us a competitive advantage across our entire footprint and contribute to strong adjusted EBITDA and EBITDA margins as that business scales. With all of these initiatives underway and progressing well, we anticipate our business to achieve mid-single digit EBITDA growth in the near future. And now, we'd like to open up the line for some questions.

Thank you. [Operator Instructions] Our first analyst is Frank Louthan from Raymond James. Frank, go ahead.

Thank you. So, you're clearly having some good success with the Edge-Outs and the Greenfield. So, talk to us about kind of what's going on with the base business, that’s still having the adds go negative and what can you do to change that? And are you giving out any significant promotions or anything that's helping you get this, pretty significant penetration in the Greenfield? And then secondly, on the balance sheet, so you've got $100 million or so left on the revolver. How long is the revolver available? And then what about funding for next year running pretty close to breakeven on the free cash flow. What do you see as far as needs new funding and where do you see leverage topping out? Thanks.

Thanks, Frank. I'll take the first question and then turn it over to John, for the second half on the revolver. I'm actually really pleased by the things that we're starting to see within our legacy base in addition to the goodness that we're seeing from the Greenfields as well. If you really break down the second quarter, adds, our net adds, would have been, without the Greenfields, a net loss of just 1,300, which is a significant improvement from the previous quarter. And, that is even with a rate increase that is in there. We're also seeing, I think, some good traction, with the launch of YouTube TV that is having an overall uplift effect on our HSD net adds. We have also had some success with some promotions that we've done, but yet with that, we're also able to bundle with other services and continue to drive that ARPU growth. So, we're actually pleased by some of the goodness that we're seeing within our legacy footprint as well, along with the works that we're doing on cost efficiency. We see the operating statistics looking very good on legacy as well as in our Greenfield business. John, do you want to talk about the revolver?

Yes. Excuse me. Yes. So, as you know, the revolver, total capacity is $250 million. We did dip into it. We're already in and out of the revolver, but we've dipped into it a bit. I think drivers of that, in the past quarter were the Sprint settlement that upfront payments that we had to make. And quite frankly, the cost of capital, as you guys know, with variable interest rates has been rising. It’s our expectation that we will start to take the revolver down as we blow through the second half of the year. It's also my expectation that the revolver -- that the leverage ratio is not going to go above 3.5 times. So, I think we see a path to do all the things we want to do, but its day-by-day. So, we don't see any big need to push the revolver in excess 3.5, and I don't anticipate at this time going up to try to get the capital. I think we can do this.

Okay. Great. Thank you very much.

Thanks, Frank.

Our next analyst is Brandon Nispel from KeyBanc. Brandon, go ahead.

Great. Thanks for taking the questions. Can you maybe give us some more detail on the price increase? I think you mentioned there was one in March and there was one in July. Maybe could you unpack that in terms of percentage of customers receiving each an average rate so we can understand the underlying growth in ARPU from just pure upselling. Then, on the second half, from a HSD net add perspective, it's still implies fourth quarter, and by far and away, your best quarter and a big positive number after the first three quarters of the year expected to be negative. How do you get confident around that? It seems like a pretty healthy ramp. Thanks.

Thanks, Brandon. Okay. On the rate increase, our rate increases, dollar-wise are consistent with our competitors that are out there. So, it still keeps us at the same kind of value proposition for customers, as our competitors have also increased rate increase, increased the high-speed data rate. We had a small percentage of the customers in March, in July, it was the majority of our base, was due for a rate increase. And so that started with July bills and is pretty well will work its way throughout this whole quarter then, that they'll get that rate increase. In addition though, I can't emphasize enough the higher speed tiers that customers are taking. So, we decided for the first time this quarter to share more about the percentage that is taking 500 meg and above of the new customer as well as up-tiering among our existing base. So, all of those things give us a lot of confidence as we look for the future. Speaking of confidence, I guess, for the future, in terms of our high-speed data adds for the remainder of this year, I think there are a number of really exciting things that are happening both in our legacy Edge-Out and Greenfield areas. As we mentioned, we are seeing an uplift from YouTube TV in terms of our high-speed data connects throughout all of our footprint, legacy, as well as Edge-Outs and Greenfield. And then in our new areas, we are not only seeing much faster penetration than we anticipated but the ARPUs, being higher as customers take higher speeds. So, all of this makes us feel good about our high-speed data numbers. All of this done with still, very loyal customers and low churn. So, we feel good about those components and believe that we can hit that full-year HSD number for the year.

Thank you, Brandon. Next up, we have Matthew Harrigan from Benchmark. Matthew, go ahead.

Thank you. As you know, I've always been fascinated by your login model. It seems to be working pretty well for determining what areas you go into. For Greenfields, I know you haven't gone into that many areas, so you don't have that much of a cross sectional comparison. Where do you feel like you're learning, I mean, you have to be really happy with the results you're getting, thus far. And are there any implications for, accelerating the bill. I know you're trying to remain sane on your spending and all that, but is that still a moving target in terms of how active you're going to be, say over a three year timeline on the Edge-Outs given the evidence success you have on the Greenfields given the evident success you're having? Thank you.

Thanks, Matt. I'd say we're learning a number of things. First of all, we feel very confident in the criteria that we're using for the selection process of new markets. We're delighted by what we're seeing. And, part of that also is the playbook we use once we've selected a market. And that playbook is everything from making sure we have strong relationships with the local communities, the leaders of those communities, the city officials, the power companies, all of those things, and those partners that you need to build out the market. In addition, we do a lot of pre-work in terms of market awareness. And then, I think our sales packages and our strategies for addressing the market are very strong as evidenced by the results we're seeing of 30% penetration in 30 days, 1% penetration per day for those first 30 days. So, we feel good about the whole playbook from selection through launch of the market. We do feel like we are probably on-track to announce another marketer too yet this year. And, for the first time today, we shared that we do plan to pass 50,000 homes between Greenfield and Edge-Outs this year. And we're still on-track to deliver our 400,000 homes that we have promised. So, we feel good about the pace of what we're doing. As you can see from our trajectory, from the first quarter to second quarter, and that we even tipped our hand and shared what we've been doing in July, the pace is picking up. There's a significant amount of pre-work that needs to be done, but then you get the machine rolling. And I feel very good about the way that our market expansion team has been really rolling out these new homes. It's a joint effort. It's very exciting. And in terms of the learnings as well, what's interesting is those things we're learning in our new markets, those insights we're bringing back in the legacy. If we're learning something that's a good best practice and vice versa, we have been competing up against very strong operators, our entire existence, and the learnings that we have as a challenger brand continue to reinforce how we know how to compete in every market that we go into. So, I would say that's what we're learning and it's been a very exciting opportunity for our whole Company. And we always are keeping an eye on the financials and the leverage to make sure that the pace is appropriate.

So, login models, a living model, like the U.S. constitution is a living document that's good to hear. Thank you.

Oh, absolutely. Yes. We're constantly feeding back in best practices, what we're learning, everything along the way. And, that's how WOW! works. We're always innovating, always learning, always trying to get better. And I think that's what keeps it exciting here and keeps us a very formidable challenger brand.

Great. Thanks, Teresa.

Thanks, Matt.

Teresa, that's the last of our questions. Can I turn it back over to you for some closing remarks?

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