Ladies and gentlemen, thank you for standing by, and welcome to the WOW! Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Andrew Posen, Vice President, Head of Investor Relations. Thank you. Please go ahead..

Good afternoon, everyone, and thank you for joining our third quarter 2020 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 the 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 law and are subject to known and unknown risks, uncertainties, and other factors, including, most recently, the economic uncertainty relating to the COVID-19 pandemic 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.

In addition, please note that in today's call and in our earnings release, we refer to certain non-GAAP financial measures. Such measures include adjusted EBITDA, transaction adjusted capital expenditures and capital expenditures excluding expansion capital expenditures.

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.

Now, I'd like to turn the call over to WOW!'s Chief Executive Officer, Teresa Elder..

Thanks, Andrew. I'm so glad you recently joined WOW! as our new Head of Investor Relations. Welcome to WOW!'s third quarter earnings call.

In addition to our news release and quarterly trending schedule that are available on the Investor Relations page on our website, this afternoon, we have also added a presentation that we are using to complement our prepared remarks.

I'm really pleased with the results that we reported today, which reflect continued progress and execution of our broadband-first strategy. Our third quarter achievements are a testament to the focus and hard work of WOW!'s employees as we all continue to adjust to new challenges.

John will walk you through the financials and key operating statistics after I provide an update on our strategy and why we continue to be excited about our progress.

In the third quarter, our revenue increased 1% from the same period last year as our high-speed data subscription revenue increased nearly 10%, offsetting a decline in our video and telephony business during the quarter. Our third quarter adjusted EBITDA was $113.5 million.

During the quarter, we added 1,800 subscribers, including approximately 3,300 high-speed data net additions.

While still growing, these additions were negatively affected by nearly 2,500 disconnects resulting from the discontinuation of the FCC Pledge on June 30 and therefore our reintroduction of normal collections processes for those customers in Q3.

Therefore, we think it is more accurate to look at the numbers on a year-to-date basis where our high-speed data net adds are up 92% from last year, totaling 27,369. This is the highest number of HSD net adds through nine months in WOW!'s history.

Our results this quarter reaffirm our belief that consumers will continue to shift away from the traditional video business toward an ever-growing number of streaming alternatives while becoming more reliant on high-speed data to support the plethora of daily activities that are now at their fingertips from IP-based video solutions to supporting the vast amount of people now working and learning from home to IoT products and gaming.

All of these depend on fast and reliable access to the Internet. We are specifically seeing this trend with respect to our new customers who continue to move toward being broadband-centric. In the third quarter, customers buying our high-speed data-only product represented 87% of total new subscribers.

This is a significant increase from the same period last year when 60% of new subscribers purchased our high-speed data-only service. This statistic has continued to improve each successive quarter from 66% in Q1, 77% in Q2, and 87% of new subscribers in Q3.

Another way of measuring our success in this transition is to look at the increasing proportion of our customers that are connecting with higher speeds. At the end of the third quarter last year, 52% of new connects purchased 200-meg speeds or higher.

In the third quarter this year, nearly 80% of new customers purchased high-speed tiers greater than 200 meg. And we don't see this trend abating this quarter. Edge-Outs continue to be part of our strategy and, in the third quarter, added more than 1,100 subscribers.

While it continues to be important, we are now more focused on increasing the penetration rates in current markets rather than spending additional capital to push new ones, especially during the pandemic. The penetration rates of both the 2018 and 2019 Edge-Out vintages validates this approach as both vintages increased in the third quarter.

The 2018 vintages increased to 19.6%, up from 18.5% last quarter, and penetration in the 2019 vintage increased to 14.8%, up from 13.6% last quarter. Overall, we continue to see momentum in our broadband-first strategy. In addition to these strong operating statistics, we announced new initiatives and met some key milestones during the quarter.

We continue to launch WOW! tv+ in markets across our footprint. The IP-based video offering is now available in 80% of our homes passed. We're excited about this product with its intuitive, easy-to-navigate access to content, which provides customers with an improved video experience and gets them to their favorite shows quickly.

WOW! tv+ is a solid step in our broadband-first strategy, allowing us to better leverage our network, enable fast and easy contactless installs and support IoT devices that more consumers are bringing into their homes.

As many businesses now have numerous employees working remotely, they need to ensure those employees have access to fast and reliable broadband in their homes. In response to this growing need, we introduced our WOW! Business Internet service in speed tiers and packages designed to address this.

WOW!'s Business Home Office solution provides bundles that include add-ons such as WOW!'s Whole-Business Wi-Fi, Static IP and Hosted VoIP. All of these services give customers a business-class level of service at an affordable price.

This is another great example of how we are positioning WOW! to expand our presence and work with new and existing customers to help them adapt and succeed in our ever-changing environment.

And as we are well into the fall and students across the country have returned to their classes, albeit many of them learning remotely, I'm very pleased to share that WOW! recently joined the ACA Connects and EducationSuperHighway's K-12 Bridge to Broadband program that launched last month.

The program is designed to help states and school districts provide Internet access for students in low-income households. We're proud to make WOW!'s award-winning customer service and broadband connections available to our communities, schools and students. Our employees are another source of pride for us.

In September, we were once again named one of Detroit's best and brightest companies to work for. This is the eighth consecutive year and the tenth time overall that WOW! has been recognized with this award in Detroit. These awards mean so much to us because they are determined by surveying our employees.

Knowing that our employees say WOW! is one of the best places to work tells me our focus on employee safety, professional development, diversity, equity and inclusion and employment engagement is what is valued by our people.

As we continue to evolve our broadband-first strategy, engaged teams will continue to be critical to our success in launching other initiatives and meeting key milestones in the future.

I would like to reinforce how pleased I am with our results today that reflect the continued execution of our strategy and the incredible commitment from all of our WOW! employees who consistently demonstrate their passion and adaptability to the challenges of our current operating environment.

Now, I'll turn the call over to John who will go over our financials in more detail..

Thanks, Teresa. This was a great quarter, and that reflects the strength of our business and critical aspects of our broadband-first strategy. Today and prospectively, we will be disclosing the components of subscription revenue.

The breakout of residential and commercial revenue will continue to be available in our trending schedules on our Investor Relations website.

In Q3, total revenue increased 1% to $288.7 million, and subscription revenue increased 2.7% to $269.5 million from the same period a year ago driven by a 9.5% increase in high-speed data revenue, partially offset by declines in video, down 2.3%; and telephony, down nearly 11% from the same period last year.

Growth in our high-speed data business continues to do well as we increasingly add new customers who connect with HSD only. These customers are also buying higher speed tiers, as Teresa commented. This bodes well for our financial metrics as we head into the fourth quarter and look forward toward next year.

Our third quarter adjusted EBITDA was $113.5 million with an adjusted EBITDA margin of 39.3%. This is down slightly from the same period last year.

However, our adjusted EBITDA in the third quarter of 2019 included a onetime adjustment that increased our numbers by $3.8 million from proceeds for the business interruption insurance related to Hurricane Michael. Excluding that onetime gain, our third quarter 2020 adjusted EBITDA increased 3% from the same period last year.

We believe that our adjusted EBITDA and EBITDA margin will continue to improve as our high-speed data business grows relative to the decline in video and telephony. If you look at the next slide, we've included a metric, incremental contribution.

That has been disclosed historically in our Form 10-Q, but we believe highlights the real value of our broadband-first strategy. Incremental contribution is defined as subscription revenue less the cost directly incurred from third parties in delivering services to our customers.

These are predominantly programming costs attributable to our video business. This slide shows very clearly that as we continue to grow our HSD revenue while video declines, our incremental contribution margin goes up significantly. During the third quarter, the incremental contribution margin was 66.5%, up from 63.6% in the same period last year.

As you can see on the slide, this figure has improved each successive quarter this year. As this trend continues, we expect to see the benefits flow through to our adjusted EBITDA as incremental contribution is a leading indicator for EBITDA. We continue to make strides toward reducing our capital expenditures.

With improvements in our incremental contribution margin and growth in HSD revenue, we believe that we are positioning our financial profile to make improvements in our free cash flow and further improve our overall leverage ratio.

In the third quarter, we reduced our capital expenditures to $51.1 million, down from $63.4 million in the same period last year and $6.1 million lower than Q2 of this year. As a result of our improved results and operating discipline, we were able to report $21.7 million in free cash flow for this quarter.

With regards to liquidity and leverage, we had $32.9 million of cash on hand at September 30, 2020. Outstanding debt totaled $2.3 billion, and we had $235.6 million of available borrowing capacity. In conclusion, this was a strong quarter where we continue to further our broadband-first strategy.

Now with two quarters under my belt, I feel just as excited about our progress, the business and the team at WOW! as I did when I started. And now, we'd like to open up the line for some questions..

[Operator Instructions] The first question comes from Kutgun Maral of RBC Capital Markets. Please go ahead, your line is open..

Great. Thanks for taking the question. I wanted to dig in a little bit more on the broadband subscriber side. I appreciate that trends this quarter are a bit messy given the Pledge impact.

Perhaps looking beyond those customers, can you provide a bit more color on what you're seeing across gross adds, churn, competitive intensity, and any notable trends into the fourth quarter that you could share with us? And maybe, thinking longer-term, it certainly seems as though the pandemic has resulted in a step function increase in demand for connectivity services, and we're seeing broadband penetration of U.S.

households certainly ramping up. Do you expect WOW! to participate in this market growth? Or do you see a potentially offsetting ramp in competition across your footprint? Thanks..

Thanks so much for the question. I appreciate it. And yes, it certainly has been an unusual year. I think there's – first of all, there's been a lot of variability across the industry on the treatment of subscribers, especially associated with the FCC Pledge.

And that's why we think the more comparable metric is really looking at our HSD net adds for the entire year. And over the year, the HSD subscribers have increased by 27,400 or 4%. And as I mentioned, the HSD net adds compared to last year are up 92%. So, they're certainly coming in differently.

The way we looked at it was having those pledged customers come in, in the second quarter. All of our customers were paying customers. And then we started to apply the normal collections in the third quarter. So, it skews that balance a little bit.

But I guess where I am very encouraged is continuing to see customers respond to our broadband offering, which really emphasizes its speed and reliability, and that it is a good value for our customers. We continue to experience really historic low levels of churn.

When I look at those Pledge customers spread over the two quarters as they normally would have been, the churn has been extremely good. On the competitive front, I think we're all doing our best to really respond to customers' needs, and be available for them.

But I see kind of a lot of normal competitive activity for the most part beyond some of the special offers that I think we all are giving out to those who are school-age kids and some of the special programs.

In general, I think we are more than participating in this growth, both with the number of our gross connects, net adds, but also seeing the continued increase in how our existing customers are using the network.

We continue to see that growth climb, and we're so proud of the advanced network that we have, that it can absolutely respond well to what our customers need for high-speed data usage.

And John, do you want to say anything else about fourth quarter at this time?.

No, we're tracking along. I mean, I think to the first part of your question, I mean, 92% year-over-year growth in HSD connects seems pretty stellar to me. So, we are, in fact, participating in this. And also a 9.5% increase in HSD revenue year-over-year as well. So, I think we feel pretty bullish on it.

I think we got the bulk of our HSD adds probably in the first two quarters, and we're sort of leveling off, so we're trying to take a look at the whole year. My expectation would be Q4 would be somewhat similar to Q3 in terms of what we put on..

Great. Thank you, both..

Your next question is from Brandon Nispel of KeyBanc. Please go ahead, your line is open..

Thanks for taking the question. This is Evan, stepping in for Brandon. We've been seeing a lot of good broadband subscriber numbers this quarter across the industry.

Can you help us think, first, about your overlap with some of your larger providers, or some of the larger competitors, including your fiber overlap? And then secondly, can you share, or talk about your share against the major categories of competitors and how that's been trending between fiber, low-speed telco, or DSL and cable? Thank you..

Thanks for the question. So, yes, we overlap with a number of competitors. Comcast is the competitor we overlap the most with, and then Charter. We also overlap with AT&T in much of our footprint. Only a small percentage, though, really with some of AT&T's fiber properties.

And I would say that we feel very good about our network and our team's ability to compete against all of those, and continue to maintain or grow our share in penetration. We don't give detailed share information across our categories, but I can tell you that we continue to be pleased with the trends that we're seeing..

Great. Thank you..

[Operator Instructions] The next question is from Frank Louthan of Raymond James. Please go ahead, your line is open..

Great. Thank you. Are there any one-time benefits in the quarter that are helping margins, maybe COVID-related that might go away? And then, I'd be curious to get your thoughts on the Stonepeak acquisition of some of your peers earlier this week at fairly high valuations.

Any thoughts of how to try and drive that kind of valuation, either a go-private transaction yourself or some other way to demonstrate sort of the discount there between what the private and public markets are saying? Thanks..

Thanks, Frank. I'll go ahead and take the second question first, and then turn it over to John for the second one if that's all right.

And yeah, we absolutely are pleased for our colleagues – our industry colleagues at Astound, and feel that really the Stonepeak acquisition is a reaffirmation of that broadband-centric approach that is right in the line with the strategy that we're rolling out as well. And with that, I'll turn it over to John..

Yeah. So, in terms of one-timers, I mean, the big one-timers throughout this year have been COVID-related. So, as you recall from last go-around, I talked about in the first half of the year, COVID sort of negatively impacted the business by about $11 million. We were anticipating a further hit to the business in the second half of around $15 million.

We got a little lucky in Q3 in terms of the impact. Excuse me. COVID impact was pretty much a net neutral. So, we had bad guys and good guys, but they sort of evened themselves out. That being said, where we originally thought we might see a $10 million hit in Q4, we're thinking that's probably closer to a $5 million hit.

And really, what it is, predominantly is a loss of advertising revenues, which makes sense. And Q4 would normally be the most robust quarter of advertising. And advertising business is just off because a lot of things are still shut down, and a lot of things will soon to be shut down, a spate of bad debt coming from across.

So just kind of, as we look at the business, specifically related to COVID, $10.7 million hit for the first half of the year, pretty much breakeven for Q3 in terms of special. In Q4, we are anticipating another hit. I'll put my [$0.02] in on Astound, I think it's fantastic. I think they're a great comp for us.

I think it's a business that, in many ways, is awfully similar to ours. And it just enhances, in my view, that WOW!, in fact, is undervalued. So, we'll keep working on our broadband-first strategy, and prove that out so all the world gets to know that. But I think it's an excellent comp for us, and we're happy that they got their deal done..

All right, great. Thank you..

There are no further questions at this time. I will turn the call over to Teresa Elder for closing remarks..

Thank you all so much for joining us this afternoon, and thank you for your continued interest and support of WOW!. We look forward to speaking with many of you in the coming weeks as we will be participating in several virtual investor conferences throughout the remainder of the year. Thanks all, and have a great evening..

This concludes today’s conference call. You may now disconnect..