WOW - NYSE

Good evening. My name is Jordan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the WideOpenWest Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Andrew Posen, Vice President, Head of Investor Relations, you may begin your conference.

Good afternoon, everyone. And thank you for joining our third 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 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 factors. 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. Reconciliation 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 afternoon 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 third quarter earnings call. Our results this quarter track with the two transitions that we are making as a business. First, the growth of new market expansion. And second, the transition to the next phase of broadband first, which involves transitioning our low-margin video business to a high-margin streaming service. On market expansion, we are making significant progress, including adding new homes passed and new customers at a pace that gives us confidence in our approach. I'm also excited about the new greenfield markets that we announced this quarter, including those in Minnesota, Central Michigan and Hernando County, Florida, which will increase our overall footprint. On the shift in our legacy markets to the next phase of broadband first strategy, we are seeing success in our video migration to YouTube TV and we expect to accelerate that initiative. While these transitions are going very well, I am, however, disappointed in worse-than-expected subscriber numbers, reporting a net HSD subscriber loss for the quarter of 4,400. This reflects challenges in our legacy footprint exacerbated by macroeconomic environmental issues that further plague our industry, such as ongoing high interest rates, inflation and low move activity. We are also seeing some more aggressive competitive pressure than previous quarters as a result of the pressures in the legacy markets and lower-than-expected new homes coming on board. Our expectation is that the fourth quarter will be significantly worse than the third quarter. Therefore, we are removing our outlook for the fourth quarter. We are, of course, taking several steps to help mitigate the expected subscriber losses in the fourth quarter. Yet, it is difficult to fully estimate the scope of these losses and the impact that it will have on our fourth quarter results. Although we acknowledge this underperformance, we continue to have confidence and believe in our plans, including our expansion initiatives, and our broadband-first strategy, which we are confident will result in improved financial and customer results in 2024. Now I would like to talk about our third quarter results which included record high-speed data revenue service, which grew more than 7% year-over-year. Adjusted EBITDA, which increased 3.5% and an adjusted EBITDA margin of 41%, all while maintaining our focus on expanding into new markets and making significant progress on migrating our video business to YouTube TV. During the third quarter, we announced three new markets, including the opportunity to pass 80,000 new homes in Michigan, 85,000 in Minnesota and 44,000 new homes in Hernando County, Florida. We have already begun initial construction in Michigan and expect to follow in Minnesota and Hernando County mid to late next year with customers coming online in the back half of 2024 and into 2025. Including our current Greenfield markets in Central Florida and South Carolina, we expect to hit our 400,000 new homes target by the end of 2027. These market expansion initiatives continue to be sensible to our strategy and represents a core thesis of our growth and value proposition. Our video migration strategy is also beginning to gain real traction as we continue marketing our partnership with YouTube TV creating a competitive advantage and an excellent opportunity to offer customers what they want and at an exceptional price. We launched with YouTube TV as our primary video offering at the beginning of August. The initial returns from this partnership are very positive with more than 13% of new subscribers signing up for YouTube TV. YouTube TV gives customers a more robust choice of programming and 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 having to overbuild their own network. YouTube TV allows us to transition away from higher-cost low-margin video to a higher-margin service with an even greater mix of channels for our customers. What we are doing is unique among cable operators and is giving customers more of what they really want at a much better price. With regard to high-speed data subscribers, as I said at the beginning of the call, we lost 4,400 high-speed data RGUs during the quarter, and we anticipate losing significantly more in the fourth quarter. There are several factors that lead to this result. The macro environment continues to be very challenging, which compounds the situation. Over the course of the year, we introduced rate increases, which led to higher than anticipated churn, predominantly for those subscribers who subscribe to lower tier speeds. During the third quarter, a large number of high-speed data customers also came off of promotion, which is resulting in higher expected churn, especially once again at the lower speed tiers. Another factor contributing to the lower third quarter figure and reduced expectations for the fourth quarter has been with the pace of construction in our greenfield market. Although expansion is going well, and we believe we are likely to hit 50,000 new homes passed by the end of this year. The pace of construction in these new markets is below our internal forecast, which is significantly reducing the number of gross connects we expected. And lastly, we are seeing fixed wireless begin to more aggressively compete for our customers at the lower speed tiers across several of our legacy markets. However, we are absolutely confident in our good value, high quality and reliable service, especially as significantly more of our customers are buying 500 meg and above. We also believe that many of these customers who left will return to WOW! due to the reliability and value of our high-speed data service. As of the end of the third quarter, we now have more than 503,000 high-speed data subscribers. As expected, our traditional video business declined further during the quarter, which will continue as we transition them to YouTube TV. As mentioned, the new partnership with YouTube TV presents a fantastic opportunity to capitalize on the shift to video streaming, which we believe will also contribute to great results next year. As you can see from the underlying operating metrics, our core business remains strong. Over 90% of our new connects are taking broadband-only, which can include streaming. As we continue to move away from offering our own video service. In concert with this transition, demand for higher speed is growing. In fact, a record share of new customers are buying higher speeds than ever, our high-speed data only selling mix showed that 80% of our new customers are buying speed above 500 meg, including further momentum in customers in legacy markets taking our 1.2 gig service. As we said before, this trend is even more pronounced in our new markets. 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 and to compete in our legacy markets. High-speed data ARPU increased again this quarter to a record $72.40, reflecting the full effect of the rate increase that was introduced in July and to a greater extent, customers purchasing higher data speeds. We expect high-speed data ARPU will increase further in the fourth quarter 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 talking about the success in our new markets. As you know, WOW! has always embraced its role as a challenger brand. So while the current environment is difficult, we know how to compete, both in our legacy footprint and we have confidence in our ability to build out new markets and rapidly increase penetration. Year-to-date, through September 30, we have now passed a total of 25,500 new homes as part of our expansion initiative including a total of 14,100 greenfield homes in central Florida and 11,400 in new Edge-Outs. In the third quarter, we passed more homes than we did in the first half of the year and more than the last three years combined. However, with that said, it's less than we had internally forecast, which is negatively impacting our overall HFC growth. 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 mid-split, high-split architecture with DAA capability for HFC, which lays the framework for our DOCSIS 4.0 and symmetrical multi-gig services in those markets. The strength of these technologies is absolutely contributing to the strong penetration rate that we are seeing in these Edge-Outs. The chart on the right-hand side of the slide shows that we continue to have strong penetration across all of our vintages. Our 2023 vintage of Edge-Outs are exceeding our expectations as we grow our footprint and add new subscribers, driving our penetration rate in this vintage to nearly 30%. We are also continuing to see strong results in our new Greenfield markets. Although the penetration rate came down during the quarter to 12.1%, this is due to the timing of when we've been adding those new homes passed. Our 2021 and 2022 vintages also reported exceptionally strong penetration rates of 48% and 31% respectively. It is this momentum and strong results in these markets that gives us confidence and belief in our strategy and long-term outlook despite the current challenges in our legacy footprint. To conclude, before handing the call to John, I want to reiterate the key themes that continue to drive our business forward and remain our growth engine. Our market expansion initiatives are now moving at a stronger pace as we add new homes and announce new greenfield markets. We are seeing fantastic customer interest in YouTube TV with approximately half of YouTube subscriptions from new customers and half from our existing customers. We're pleased with the record high speed data revenue which increased more than 7% from the same period last year and more than 80% of our new customers are buying speeds above 500 megs. All of this is translating into record HSD ARPU and adjusted EVA growth. I also want to acknowledge the challenges in our legacy footprint and emphasize that we are executing improvements in the legacy business while not being distracted from our important expansion initiatives. The pace of new homes past in our expansion initiatives, while behind what we had internally had forecast, is picking up and continues to show strong results. Now I'll turn the call over to John, who will go over financials in large detail.

Thanks, Teresa. In the third quarter, we reported record HSD revenue, which increased 7.3%, reflecting the full impact of this year's respective rate increases, as well as new and existing customers upgrading to higher speed tiers. The growth in HSD revenue was offset by a 14.1% and 9.4% drop in Video and Telephony revenue, respectively, resulting in a slight decline in total revenue from the same period last year to $173.1 million. Adjusted EBITDA increased 3.5% from the same period last year to $70.9 million with an adjusted EBITDA margin of 41%, driven by the increase in higher-margin HSD revenue. The incremental contribution margin increased sequentially and continued to grow year-over-year, driven by the proportionate increase in HSD revenue, which increased to 63% of our total revenue this quarter, up from 59% in the same period last year. Now for a progress update on our cost structure alignment. We continue to be on pace to hit our target of $35.5 million by the end of 2025. And -- as of the third quarter, our total savings equate to $26 million, which represents approximately 73% of the $35.5 million that we identified for cost reduction over several years. In addition to these measures, we also made further headcount reductions, predominantly in our corporate and administrative areas. We've made significant progress on realizing savings across the company, and we'll continue to be diligent as we manage cost despite the higher inflationary environment. We ended the quarter with total cash of $226 million and total outstanding debt of $889.1 million with our leverage ratio at 3.1 times. We reported total capital spend of $64.5 million, up $26.8 million from last year. Our core CapEx efficiency improved to 18.3% in the third quarter. Expansion CapEx increased $22.3 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 Greenville County, South Carolina. In the third quarter, we spent $28 million on Greenfield $2.1 million on Edge-Outs and an additional $2.8 million on business services. Looking at the right side of the slide, our results for Q3 2023 unlevered adjusted free cash flow which we define as adjusted EBITDA less CapEx, decreased to $6.4 million, down from $30.8 million in Q3 of 2022, primarily driven by higher expansion spend predominantly on Greenfield. This afternoon, we reported a net loss of $104.5 million. This is due to a non-cash incurment charge that we took as required by GAAP. 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-Outs or any aspect of our expansion strategy, and we remain excited about our progress in new markets. Finally, before we open up the call for questions, I'd like to provide some additional color regarding our outlook for the remainder of the year. As Teresa indicated in her comments today, the environment for subscribers continues to be challenging in our legacy footprint. We believe that our HSD net adds for the fourth quarter will be significantly worse than the third quarter. As there is still some uncertainty in this number, we're working to understand the full impact on our business as the reduction in HSD subscribers will result in lower revenue and lower adjusted EBITDA. We believe it will be isolated to the fourth quarter as new initiatives in our legacy markets and further expansion in new markets will begin to more than offset the declines in our base next year. Despite the significant lowering of expectations, the momentum in our expansion markets, both Greenfields and Edge-Outs, early successes from YouTube TV give us confidence in our long-term outlook. And now we'd like to open up the line and take your questions.

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

All right. Great. Thank you. So when you add back the subs that you added in the expansion markets to kind of the net loss, you really kind of lost about almost 14,000 subscribers year-to-date, and it's going to get worse. Can you give us an idea of what are the main drivers of that and how that's going to change? I think, John, you just mentioned you got some initiatives in Q4 and expansion is going to make the sub growth better. So are you saying that even with all of that extra effort next year, subs are just going to kind of be positive for the year, but not -- how much does that really bounce back? What's -- what are some of the bigger picture details that are going on here?

Yeah, Frank, why don't I jump in first and then, John can certainly add on as well. So thanks for your question, so yes, on the subscribers, really a number of buckets there. First of all, as we've talked about the macro environment, there are just fewer opportunities for new connects in the market and more players really buying for those customers. So the competition with wireless, I think in previous quarters, I told you it's been barely a nit that we've seen. It started to pick up. And so we've seen more. So we've always enjoyed traditionally very, very low churn. It has ticked up a bit. And so that is a big piece of it, both at the Connect level, for more competitors who are buying for those connects and then at the churn level with the rate increase that we did, one of the things that we're seeing in this environment is customers, I think, are even more price conscious than ever. And so we saw a slight tick up, just slight ticks up, in churn with a tick down in new connects can really make a difference. And we had expected more homes from Greenfield to come in to really short the difference and saw all of those kind of things come together in a negative way in the third quarter and more so in the fourth quarter. And I think the net adds could even be triple the loss in the fourth quarter of what we saw in the third quarter. So those are the things that are coming together. In terms of new initiatives, we are continuing to do even more. And we've always been good with customer retention, so doing more there, more with saving customers, even more creative approaches on attracting new customers. And I have to tell you, I talked quite a bit about the YouTube TV and the percent of new customers buying it. But one of the things we're also seeing is we have new customers who perhaps wouldn't have considered us before, who are considering us now because of the YouTube TV offering. So as much as we've seen an up-tick in overall connects because of YouTube TV, it doesn't offset some of the other competition and issues with churn. But we do feel good about 2024 and turning this around with the initiatives that we have in place, along with the influx of many more Greenfield and Edge-Out homes.

Thank you.

Yeah. And I hope that Frank is when the Greenfield homes come on market they get sold into fairly quickly. So it's also a little bit of A Chicken And Egg timing here. So if they come in late in the quarter, it doesn't do very much for the quarter. But when we ended this quarter, which should certainly help us a little bit on the greenfield side next quarter. And then Teresa was suggesting in end of the year with over 50,000 homes those 50,000 homes to be sold into. We don't see the same competitive issues in the greenfield markets that we see in the legacy markets. Those are higher speeds in different neighborhoods with no competition with a little bit of a different animal. And so it’s a weird sort of timing at the moment.

Okay. And then just a follow-up. Are you calling -- are you going to force off your pay-TV subscribers? And what percentage of them take high-speed data? And are you really -- are you calling for the end of your Pay TV product?

Yes. Let me talk about our video migration. So we definitely are encouraging customers to take our traditional video to either subscribe to YouTube TV or a streaming service. And so we do let them know that, that is an option that is coming. We have not forced customers off of video to date. And we are really trying to manage churn on that to continue to support that. With that said, we know that over the next year, 1.5 years, we want to completely get off of our QAM network. So at some point, there will be that. That's not what we're doing is forcing them off right now. And in terms of the percentage of video customers who also take high-speed data, I mean, it's virtually all of them, we have very -- a small handful of customers that only take video or video and phone. So it is -- you can pretty much assume that almost all of them take high-speed data.

Okay. Thank you.

Your next question comes from the line of Brandon Nispel from KeyBanc Capital Markets. Your line is live.

Hey thanks for taking the question. Teresa, so I heard you say, I think losses for Internet net additions in 4Q could be nearly triple what they were this quarter. But I'm hoping you could address maybe what you're doing specifically in the legacy footprint to get losses or at least mitigate the losses going forward? And then I was hoping you could maybe outline a little bit what were wrong internally versus plan on some of the expansion, it sounded as this last quarter, that was tracking at least in line, if not better than your expectation. So it sounds like something maybe within the quarter. So I was hoping you could elaborate. Thanks.

Yes. Thanks for the questions, Brandon. In terms of mitigating the losses, we are doing a lot there. I mean, for one thing, we don't have a rate increase this quarter. The rate increase in July behaved differently than previous rate increases we've taken. And just, I guess, a little bit of the inside baseball on that is that I think we hadn't done a rate increase like this in the summer before. When we were doing our results last quarter, we thought things were looking pretty good. It didn't look like -- effect, if anything, it looked like churn was lower than we had even anticipated in forecast. I think what we found is that customers started to look at their bills and maybe ask questions about the rate increase later in September, so much later than what you would have normally seen in terms of a reaction to a rate increase. Perhaps that's with summer vacations or once the kids got back in school, they started actually looking at their bills more, it's hard to say. But it behaved a little differently. And so we were caught a bit off guard because we thought it was coming in as anticipated, and it actually had been higher churn than we forecast later than we forecast. So we were a bit surprised by that. So one of the things we're not doing in the fourth quarter is a rate increase. However, we do have a substantial number of promo roll-offs that has happened in the third quarter and even some going into the fourth quarter. And that's from promotions we did last year at this time, kind of have a 12-month thing. It's part of the phenomena of the competitiveness of the packages that we offer in this environment. And so we, of course, have plans and are executing plans to try to mitigate some of that so that customers aren't seeing what feels like to them a potential another rate increase. So, certainly significant plans there. We really only launched YouTube TV on August 2. It's now fully integrated with our billing system. Customers can buy it online, which was not a thing you could do with video for a while before. All of those things are also causing some upside plus the number of other things that we're doing that we're rolling out that we'll talk about as we actually do them in the marketplace. So we've got quite a bit of activity underway that gives us great confidence in what's going to happen once we get through the fourth quarter. In terms of the second part of the question, one of the big reasons we think there is a bigger than expected loss in the fourth quarter is that we're behind our internal plans for homes passed. We were still feeling good about the external and still are feeling pretty good about the external number that we gave you for the 50,000. And I would say it's just what you would expect in construction in terms of the challenges of getting out and building these networks. So I don't know that the same thing that's unusual or specific to us. Knock on wood, we have not had any weather issues that have slowed us down. So that has been very good. And some of these are hard to predict. For example, you may need a power supply or this route with a one permit left approved. You can have all the construction done, except for maybe one or two issues. And that whole area of, let's say, 5,000 homes isn't lit up. So once those things click, they start to really flow. So you just need a few of those. One of the things we're doing to kind of help mitigate some of those risks for the future is working in more markets at once rather than just in the couple that we have been. So then you aren't just single threaded through one issue here or there, but you have multiple shots on goal across multiple markets. So I am pleased with the pace and how it's picked up third quarter to first half. But candidly, we want it to be a lot further along than we are. And that pace continues to pick up as we go into the fourth quarter, but it's causing us a shortage of those gross adds that we were counting on. Does that help?

Yes. I appreciate the color. Thank you.

There are no further questions at this time. Teresa Elder, Chief Executive Officer, I turn the call back over to you for final remarks.

Thanks, Jordan. And so thanks so much to all of you for joining us on this call today. We appreciate your continued interest and support of WOW!.